A small drop in headline inflation usually doesn't have much impact, if any.

Inflation rose 2.5% Instead of 2.6%, it doesn’t change much for the macro economy and the squeeze on living costs felt by households. The decline was entirely due to lower hotel prices and slower-than-usual increases in airfares in December.

But the extraordinarily important 0.1% drop marked a sigh of relief for Chancellor Rachel Reeves and some respite from the supportive factors behind it.

The underlying inflation data, which shows the direction of price pressures over the year, is what the Bank of England watches most closely when it comes to cutting interest rates.

After excluding the direct impact of energy and food price fluctuations, core inflation is now at its lowest point in four years, falling to 3.2% from 3.5% in December. Services inflation fell to 4.4%, the lowest in two years, after falling sharply from 5%. This is really positive news.

For the true nerds, inflation in the supply chain (including services) also points to modest inflationary pressures.

As a result, inflation in the UK can be viewed from a rather different perspective. While no one can predict exactly how the Bank of England will react, it removes any objections to a rate cut next month. Markets scrambled to keep up this morning and are now back to forecasting further rate cuts after February this year.

However, there are two major uncertainties - whether President-elect Trump will impose tariffs on the scale he has threatened, and how British businesses will react to upcoming increases in National Insurance Contributions (NICs) and minimum wage increases due in April Response wages. Energy bill prices are also expected to rise in April.

Tariffs and upcoming changes to the NIC and minimum wage may not ultimately cause the problems for the UK economy that some have warned.

While some expect businesses to raise prices in response to budget changes, some may also choose to compress wages with lower-than-expected annual wage increases. The overall inflationary impact depends on how businesses respond, and the fact is we don't know yet.

Likewise, Trump's tariffs could lead to U.S. inflation, affecting U.S. interest rates. But some at the Bank believe there could be a scenario where cheaper tariffed imports, such as those from China, are diverted to the UK, helping to curb British inflation.

What actually happens remains uncertain, but the results may be opposite to what one expects.

Therefore, the small fall in UK inflation can currently be seen as a fire break of sorts, breaking the bubble hysteria that has characterized the past few weeks. Those betting against the UK in international markets will see that there is another side to this bet. UK inflation is in the middle of the G7.

Still, the so-called global "bond market jitters" remain, sensitive to every new piece of data. The UK government still needs to be convinced on the details of its growth plan. This will mean fast-tracking infrastructure, industrial and trade strategies.

Market borrowing rates remain at a certain level and the chancellor may need to adjust spending plans with fresh cuts before Easter to meet her own borrowing rules.

Donald Trump's unconventional trade policies cast a huge shadow over the inflation outlook and all markets.

The unrest has not gone away. Inflation is likely to rise again in the coming months. But both headline and underlying inflation data in the UK are currently pointing in the right direction. Currently, it's a welcome safe harbor, but the sea remains rough.