Consumer prices were notably weaker than expected in January. A 0.6 percent monthly decline was 0.2 percentage points steeper than the market consensus and trimmed the headline annual inflation rate from December's 10.5 percent to 10.1 percent, matching a 5-month low. The yearly rate has now fallen for three months in a row after peaking at 11.1 percent in October but is still some 8.1 percentage points above the BoE's medium-term target.

The main contribution to the slowdown in the annual rate was again transport where prices dropped 3.6 percent on the month compared with just a 0.3 percent fall over the same period a year ago. This alone subtracted 0.4 percentage points and largely reflected weaker transport services and fuel. Elsewhere, restaurants and hotels (minus 0.9 percent after minus 0.4 percent) and furniture, household equipment and maintenance (minus 1.1 percent after minus 0.5 percent) also had a negative impact. The main upward effect was made by alcohol and tobacco (2.7 percent after 1.3 percent).

As a result, the core CPI dropped a steep monthly 0.9 percent, sharp enough to reduce the underlying annual inflation rate from 6.3 percent to 5.8 percent which equalled its lowest reading since March last year.

Today's report is surprisingly soft and will certainly strengthen the case of those BoE MPC's doves calling for no further increase in Bank Rate. Even so, with wages still accelerating, a further tightening in March remains very likely. That said, a smaller, 25 basis point move, is now looking all the more probable. The UK's ECDI currently stands at minus 25 and the ECDI-P at minus 20, both measures indicating that economic activity in general is running somewhat behind market expectations.

Consumer prices are expected to decrease 0.4 percent on the month in January for a 10.3 year-over-year rate. Pressures in December, at a 10.5 percent annual rate, remained severe but at least weren't more severe than expected.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.