UK inflation eases to 3.6% Britain's annual inflation rate eased to 3.6 per cent last month, continuing its steep decline from a peak of more than 5 per cent in the autumn. Economists had expected the lower annual change to the consumer price index, down from 4.2 per cent the previous month, which came largely because last year's increase to value added tax dropped out of the annual comparison. Petrol prices were also rising very quickly a year ago and are now more stable. CPI annual inflation has dropped by 1.2 percentage points over the past two months, the biggest fall over a two-month period since the autumn of 2008 when the world tipped into recession. Nevertheless, Mervyn King, Bank of England governor, was forced to write his ninth successive quarterly letter to the chancellor on Tuesday to explain why inflation was more than one percentage point above the Bank's 2 per cent target. He wrote that inflation had been pushed higher by temporary factors such as the VAT increase and high energy prices. "The effect of the factors that temporarily pushed up inflation is now waning," he wrote, adding that the Monetary Policy Committee's "best collective judgment" was that CPI inflation would fall to "around" the Bank's target by the end of the year. The Bank will release its new inflation forecasts on Wednesday. In its previous forecast, it predicted annual inflation would dip slightly below the Bank's 2 per cent target by the end of the year. Inflation running at twice the pace of wage growth has made Britons poorer in real terms and constrained their spending. Economists hope spending will pick up again this year as inflation moderates. "The sharp drop in inflation that is under way should be welcomed as a sign that the worst of the squeeze [on households] is probably behind us," Simon Hayes, an economist at Barclays Capital, said. It is true that fiscal austerity, the euro area turmoil and tight credit remain serious causes for concern, but falling inflation is a small mercy for which UK households can be thankful. Annual inflation as measured by the retail price index declined even more dramatically, down from 4.8 per cent in December to 3.9 per cent in January. Economists expect the effects of the VAT increase to continue to play a role in pushing annual CPI inflation lower over the next month or two, because some retailers phased in the higher tax rate gradually last year. They are most interested in what will happen to inflation after these technical effects wear off. Some believe the weakness of the economy will drag inflation even lower, while others suspect it may remain fairly sticky. "It won't really be until after Easter when a better assessment can be made of the underlying inflationary pressures that lie beneath these base effects," David Tinsley, an economist at BNP Paribas said.