Inflation plunges to 14-month low

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The consumer prices index (CPI) rate of inflation fell to 3.6% last month, from 4.2% in December, as the previous year's VAT hike from 17.5% to 20% fell out of the year-on-year comparison.

In a letter of explanation to the Chancellor, Bank of England governor Sir Mervyn King said further falls in petrol and utility prices are on the way, and he added: "The effect of the factors that temporarily pushed up inflation is now waning."

However economists warned that the softer cost of living is likely to weigh down on already sluggish wage growth, which at 1.9% is nearly half the rate of inflation.

TUC general-secretary Brendan Barber said: "With prices still increasing twice as fast as wages, workers are still getting poorer month by month while high unemployment and wage stagnation persists."

The CPI rate has now fallen 1.2 percentage points since November, the largest fall over two consecutive months in just over three years.

The figures come a day ahead of the Bank's quarterly inflation report, which is expected to confirm its belief that inflation will hit the 2% target and possibly fall further in early 2013.

Prime Minister David Cameron said: "Inflation's coming down and that is good news because the cost of living is the most important issue for families up and down the country.

"The Government can help. We've frozen council tax, we've cut petrol duty and today we're trying to deal with another big bill that faces families, and that's insurance for homes and cars, by trying to stop some of the false claims that take place.

"So, Government's on the side of families, helping families, helping with the cost of living, but there's more we need to do."