Osborne defends his cuts strategy as inflation falls

Official figures revealed inflation fell to a 14-month low of 3.6 per cent last month from 4.2 per cent in December.

The drop was mainly due to the previous year's rise in VAT to 20 per cent falling out of the system, but was helped by a slowdown in the soaring cost of oil and petrol.

But the good news was partly overshadowed by last night's warning from the credit ratings agency, Moody's, that Britain's prized triple-A rating could be downgraded if the eurozone struggles for the next 18 months.

That drove Mr Osborne to come out fighting to defend his austerity strategy, insisting that any relaxation on paying down the nation's debts would trigger a crisis.

"We can't waver in the path of dealing with our debts and here is yet another organisation warning Britain that if we spend or borrow too much we are going to lose our credit rating," he said. The gravest danger would be a collapse in investor confidence if there was a downgrade, he argued.

"If people don't invest in our economy, you don't get growth and you don't get jobs. It's yet another reminder Britain doesn't have some easy route out of the economic problems that have accumulated over the past decade."

But shadow chancellor Ed Balls said Moody's had served "a significant warning" that Coalition economics were failing. "With our economy now in reverse, unemployment at a 17-year high and £158 billion extra borrowing to pay for economic failure, the case for a change of course and a real plan for jobs and growth is growing by the day."

Bank of England chief governor Sir Mervyn King was writing a letter of explanation for the inflation rate, as required every three months when it exceeds the two per cent target rate. Today's fall vindicates his decision last week to pump an extra £50 billion into the economy.

James Knightley, analyst at ING Bank, said CPI could slide far below target to one per cent by the end of the year.

Clothing prices did not fall as much as January 2010 because retailers brought New Year discounts forward in an attempt to boost trade, said the Office for National Statistics.

Fuel prices rose more slowly. The average price of petrol last month rose by 0.6p a litre, compared with a 5.4p rise last year, to £1.33 per litre. Diesel was up 0.7p, compared with a 5.8p rise, at £1.41 per litre. Food prices were flat.