Updates not atomic with respect to indexes

Hi there, I am having a problem with the following code:

CREATE TABLE temp ( num integer UNIQUE );

INSERT INTO temp (num) VALUES (1);
INSERT INTO temp (num) VALUES (2);
INSERT INTO temp (num) VALUES (3);

UPDATE temp SET num = num+1;

If the update is really meant to be atomic then this should work, as the
column is still unique afterwards. However, I get a
ERROR:  duplicate key violates unique constraint "temp_num_key"

Is this something I misunderstand about SQL & ACID in general, a known problem
in Posgresql, or bug which will be fixed sometime. Should I report this as a
bug?

Thanks for your help in advance!

Ben Young