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The UK inflation figure for January was as HUGE as expected.

But since the rise was due to January's VAT hike and commodity price spike there is a chance that Mervyn King will continue with his mantra that higher headline inflation is only a temporary phenomenon, and today's data is thus not a sign of stagflation in the UK.

Indeed, the core rate of inflation - stripped of volatile elements like commodity prices and VAT rises - is still fairly weak, and running well below 2%.

Interestingly, 2-year Gilt yields fell immediately after the release dragging GBP lower with it.

This could be due to a couple of reasons:

1, that the market was pricing in for an even larger number - possibly towards 5%.

2, that the market is recalibrating itself before tomorrow's Inflation Report and King's presentation.

While this figure no doubt keeps the pressure on the BOE, it doesn't add to the pressure. Tomorrow will be more important for the outlook for near-term interest rates and thus will have more of an impact on bond yields and thus the pound.

So we wait for 1030 GMT tomorrow....

Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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