EUROPEAN CURRENCIES LEAD THE WAY AGAIN UK inflation numbers reignite talk of an interest rate increase Australian inflation expectations jump to 4.6% on flooding fears Sterling continued the gentle upward progress with which it began the year. When London opened this morning it was the best part of a cent higher on the week, having covered a range of three cents. A big week for UK economic data brought figures for inflation, employment and retail sales. None of them was unreservedly helpful to sterling. Consumer price index data on Tuesday showed prices rising by 3.7% in 2010 as a whole. It rounded of a year in which inflation had been at or beyond its 3% upper limit every single month and it reignited the debate about what the Bank of England should do about interest rates. Opinion is sharply divided. If the Bank raises interest rates to fight inflation it risks squashing the frail recovery; if it does nothing it risks its own credibility as guardian of price stability. Either course could reflect badly on sterling if investors decide to view it in a negative light. The employment numbers were better than the previous month, if only because jobless claims over the two months went down by two thousand more than expected. That said, another 89,000 people dropped off the jobs radar, labelled "economically inactive" because they have given up looking for work. Friday's retail sales figures for December were unremittingly bad, with sales down by -0.8% on the month and flat on the year. Unusually, investors chose not to punish sterling for the disappointing numbers. In London at least, traders could vividly remember the arctic weather that had kept consumers away from the shops. A shortage of hard economic data from Australia left investors to wring as much meaning as they could from a -3.1% annual fall in motor vehicle sales and quarterly falls in the import price index of -3.8% and the export price index of -8.1%. There was not much meaning to find. They were left to ponder a couple of inflation numbers. The University of Melbourne's TD Securities figure showed prices rising by 0.2% in December, putting the annual rate for calendar 2010 at 3.8%. It was in line with expectations. Of greater concern - at least to the Reserve Bank of Australia - would have been the Melbourne Institute's survey of consumer expectations of inflation during the next 12 months. In December the consensus was that prices would rise by 2.8%: In January that expectation had leapt to 4.6%, largely as a result of the flooding and the price increases people think it will cause. This week brings two important events for sterling. On Tuesday the first estimate of fourth quarter gross domestic product (GDP) are expected to show quarterly growth of 0.5%, a slowdown from the 0.7% recorded in Q3. The Bank of England publishes the minutes of January's Monetary Policy Committee (MPC) meeting the following day. Sterling's supporters will be hoping to see that more than one member voted for an interest rate increase. For the Aussie dollar the main item will be yet another inflation measure, this one from the Australian Bureau of Statistics. The official number is expected to come in at a lower level than the one from Melbourne university, probably close to 3.0%. On Wednesday Australian financial markets will take a break for Australia Day.