January 13, 2012 / 9:03 PM / in 6 years

December annual inflation seen easing to 2.8 percent

WHAT: Canada's consumer price index for December

WHEN: Friday, Jan 20 at 7 a.m.

FACTORS TO WATCH: Annual inflation is expected to ease slightly from November. But the year-on-year rate would still be well above the Bank of Canada's 2 percent target and may top the bank's 2.7 percent estimate for fourth quarter CPI year-on-year. However, that projection was made in October and the bank may tweak it in its Monetary Policy Report, due two days prior to the release of the CPI data.

Declining gasoline prices are the main factor bringing down the monthly CPI in December.

Core CPI, which strips out volatile items and is a more realistic indicator of underlying price trends, will likely decline on the month due to retailer discounts during the Christmas shopping season and as car dealers offer better deals on 2012 models after supply-chain disruptions drove up car prices in prior months.

The data is unlikely to have much impact on the Bank of Canada's rate outlook, partly because the bank next sets rates on Tuesday January 17 and its next announcement is only on March 8.

Central bank officials have sounded relaxed about price pressures in their public remarks and projections show the annual inflation rate declining significantly this year compared to 2011. Policy decisions will be more linked to U.S. economic growth and the unfolding European debt crisis.

MARKET IMPACT:

A higher-than-expected CPI reading could drive up the Canadian dollar and lower bond prices as investors see central bank rate cuts as less likely.

Markets are pricing in an 88 percent chance that the key policy rate will remain unchanged next week, but traders see a good chance of a cut later this year.

However, only five of 41 economists and strategists surveyed by Reuters forecast a rate cut by mid-2012. The median forecast was for the next move to be a hike, but not until the first quarter of 2013.

Reporting By Louise Egan; editing by Rob Wilson

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