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BUENOS AIRES (Reuters) - A stagnant economy and one of the world's highest inflation rates are making Argentina's annual wage talks thornier than ever this year just as President Cristina Fernandez turns her attention to mid-term elections.
Fernandez, who hails from the left of the Peronist party that has dominated Argentine politics since the late 1940s, has an increasingly difficult relationship with the unions and that is raising the risk of strikes ahead of the October elections.
The combative president has divided Argentina's largest labor federation, the CGT, ostracizing leaders who became critical of her six-year-old government and recruiting more amenable replacements with whom to negotiate.
But a sharp slowdown coupled with inflation forecast by private economists to reach 30 percent this year is exposing cracks in her alliance with government-friendly unionists.
Galloping prices and a rising tax burden are eroding consumers' purchasing power, and even allied union leaders are unwilling to accept a 20 percent ceiling the government and companies want to set for wage claims.
"The unions are going to react," said Sergio Romero, secretary general of the UDA teachers union that belongs to the pro-government wing of the CGT.
"We went to the negotiating table with a flexible approach and what we got was a unilateral response. We expected a bigger effort from the state to improve the education system," he told Reuters. "The government is condemning teachers to survive on 3,000 pesos ($600) a month."
Members of Romero's union want a 30 percent pay rise, a demand shared by the large food industry union, which also belongs to government-friendly CGT ranks.
"It's going to be a different round of pay talks this year. Inflation is higher and the economic recovery has been feeble," said economist Ernesto Kritz, a specialist on employment issues.
Inflation in Latin America's third-biggest economy sped up slightly to 25 percent in 2012, according to private economists, while economic activity grew a meager 1.9 percent, suggesting a decade-long boom has finally sputtered out.
Referring to the upcoming wage negotiations, Fernandez called in January for "a bit of good sense," saying inflation was not "a natural phenomenon, but something that all sectors play a part in."
She seldom mentions the word inflation and dismisses criticism from economists, consumer groups and the International Monetary Fund of the state's official consumer price data, which put last year's inflation rate at just 10.8 percent.
Shunning orthodox monetary policy recipes to cool prices, Fernandez instead forged a two-month price freeze accord with supermarket chains and appliance stores.
Pay talks normally start in February and last until July, with teachers traditionally kicking off the public sector negotiations.
In a sign of what may lie ahead, the education ministry last week made teachers a non-negotiable offer of 22 percent to be paid in three stages over the course of the coming year. They swiftly rejected the raise and called a strike.
Hospital workers in Buenos Aires province, home to nearly 40 percent of the country's population, have vowed to walk off the job on Monday after the cash-strapped provincial government warned it cannot meet their demands.
Businesses, meanwhile, say wage hikes that keep pace with inflation are becoming unsustainable as Argentine industry rapidly loses competitiveness.
"Pay rises of 30 percent are just not viable. We need a dose of rationality or else we're likely to lose companies and lose jobs," said Daniel Funes de Rioja, president of the COPAL food industry association.
Although unemployment remains at low levels of about 7 percent, inflation is eating away at living standards and is a growing concern for voters, who will elect almost half of Congress in the October legislative elections.
The vote could determine Fernandez's political future because she will only be able to run for a third consecutive term in 2015 if she gains the two-thirds congressional majority needed to seek constitutional reform.
Fernandez's current approval ratings suggest she could struggle. Her positive image was 30.7 percent in a January survey by the Management & Fit polling firm, up slightly from December but far below the 59.1 percent of February 2012.
The opposition's persistent weakness, however, and the fact that Fernandez also did badly in 2009 mid-term elections before easily winning re-election two years later might help her allies strengthen their grip on Congress.
Much will depend on her success in balancing the conflicting demands of workers and industry on salaries.
"People are worried about mundane issues that affect their everyday lives - wages, prices, inflation ... and this could be played out when it comes to voting," said Mariel Fornoni, a director at Management & Fit.
($1 = 5.03 pesos)
Writing by Helen Popper; Editing by Kieran Murray and Phil Berlowitz