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Perhaps one of the more intriguing prospects heading into the US CPI report today is what if inflation cools and the Fed simply decides to shrug it off? Well, that may very well happen. Wall Street is expecting a softer inflation reading for October but I wouldn't be so quick to assume that it will be enough to change the Fed's thinking ahead of the December meeting. The consensus estimate is for headline inflation to rise by 0.3% m/m in October, down from 0.6% in September. Meanwhile, core inflation is expected to ease to 0.2% m/m - down from 0.3% in the month before. Morgan Stanley and Bank of America are both leaning towards an even softer headline reading of 0.2%. The former sees core inflation slowing to just 0.19%, with shelter, hotel prices, airfares and education costs normalising after September's unusually strong readings. But even so, the latter isn't quite buying the idea that cooler inflation will be enough to derail another Fed rate hike in December. BofA 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". And markets are also already leaning heavily in that direction. Fed funds futures are pricing in roughly an 84% probability of a 25 bps rate hike for December, suggesting that traders are hardly expecting today's inflation report to throw the Fed off course. If anything else, that also means there is arguably more room for disappointment if the data surprises to the downside; as compared to potential for any further excitement from a reading that merely reinforces existing expectations. So, what can we expect from the dollar in this case? MUFG is one to warn that the greenback is already running ahead of short-term yield spreads, suggesting that it may take a hawkish inflation surprise to sustain its recent strength. In other words, even an inflation report that keeps the Fed on track to hike rates might not necessarily be enough to give dollar…

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