Are you allowed to use the spell Shrink Item on a living creature?
Shrink Item is specifically designed for an object, for which creatures do not qualify. You're wanting either Reduce Person or Reduce Creature.
Or Reduce Animal, as the case might be. http://archive.wizards.com/default.asp?x=dnd/lists/spells&tablefilter=reduce
The spell specifically mentions a non-living object so no....but you COULD kill them and shrink their body (if you needed to hide a corpse somewhere but with a lack of space).