Consumer price inflation is expected to have barely budged in October, after a hurricane-related jump in September.
The consumer price index is expected to be up 0.1 percent on the headline, but 0.2 percent when excluding fuel and food, according to Thomson Reuters.
CPI is released at 8:30 a.m. ET Wednesday, at the same time as retail sales, and is one of the most important reports of the month.
"CPI is hugely important because that will help dictate the tone of the Fed, which seems to be on the fence about this December rate hike, even though it's a given it's going to happen," said Peter Boockvar, chief market analyst at Lindsey Group.
The Fed's preferred measure of inflation is the personal consumption expenditures inflation index, but the CPI comes out first and should show whether there's any traction in inflation.
Headline CPI rose 0.5 percent in September, lifted by a hurricane-related jump in gasoline. Core CPI in September was up 0.1 percent. The core rate is expected to grow at 1.7 percent on an annual basis in October, the same as September.
The Fed has targeted a 2 percent inflation rate but has signaled it will raise rates even without reaching its target. If the CPI is much weaker than expected, that will cast doubt on the Fed's next rate hike, but if it is much stronger, that could increase market expectations for next year. The Fed has forecast three interest-rate hikes for next year, with the market barely anticipating two.
Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, said most of the post-hurricane impact should fade. But she said there may be an increase in automobile prices, as consumers bought cars in storm-hit areas to replace damaged vehicles. Automobile prices had been falling before the storms. "Now that sales have picked up, maybe that helps on balance," she said.
Bond traders have been awaiting the CPI report, as the 2-year yield continues to inch higher in Tuesday trading. It was at 1.68 percent late Tuesday and most reflects Fed interest-rate expectations.