US CPI preview: Mild inflation expected but Fed may still hike in December

One of the more interesting aspects ahead of today's US CPI release is whether the Federal Reserve might simply ignore a cooling inflation reading. That scenario could indeed play out.

Wall Street forecasts a softer October inflation figure, but it may not be enough to alter the Fed's stance before its December meeting. The consensus points to headline inflation increasing 0.3% month-over-month in October, a decline from 0.6% in September. Core inflation is predicted to ease to 0.2% month-over-month, down from 0.3% the previous month.

Morgan Stanley and Bank of America both expect an even softer headline figure of 0.2%. Morgan Stanley sees core inflation slowing to just 0.19%, with shelter, hotel prices, airfares and education costs returning to normal after September's unusually strong readings. However, Bank of America does not believe that cooler inflation will be sufficient to prevent another Fed rate hike in December.

Bank of America argues that a 0.2% core reading would still effectively lock in a December move, with "only an indisputably soft 0.1% reading could affect the calculus".

Markets are already heavily leaning that way. Fed funds futures show roughly an 84% probability of a 25 basis point rate hike in December, indicating traders do not expect today's inflation report to throw the Fed off course.

If anything, that means there is more room for disappointment if the data surprises to the downside, compared to potential excitement from a reading that simply confirms existing expectations.

What does this mean for the dollar? MUFG warns that the greenback is already outpacing short-term yield spreads, suggesting a hawkish inflation surprise may be needed to sustain its recent strength.

In other words, even an inflation report that keeps the Fed on track to hike rates may not give dollar bulls another reason to celebrate. MUFG targets EUR/USD at 1.12 and USD/JPY at 155 by year-end.

Be aware of a statistical quirk in today's release. The BLS will not publish the usual annual inflation comparisons because October 2025 data is missing due to last year's government shutdown. That makes the monthly readings even more significant.

For the bigger picture, the real question today is not just whether inflation pressures are showing signs of cooling. It is whether they are seen cooling enough to force the Fed and markets to rethink December.