The UK's rate of inflation has fallen to its lowest rate in 14 months in a boost to cash-strapped Britons.
The consumer price index (CPI) fell to 3.6% in January from 4.2% in December, while the retail price index, historically used for indexation of pensions and state benefits. fell to 3.9% from 4.8% in December.
There was some upward pressure from clothing prices in the month as January's sales were less deep than in 2011, after retailers brought their turn-of-the-year clearances forward to draw in customers.
As the rate is still more than a percentage point away from the Government's 2% target, it triggers a letter of explanation from Bank of England Governor Sir Mervyn King to Chancellor George Osborne.
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.
The data adds further weight to the Bank's decision last week to pump an extra £50 billion into the economy through its quantitative easing programme.
The VAT effect had a pronounced impact on transport costs, which applied the greatest downward pressure to overall prices in January, as the fell 0.7%.
The fall was also driven by softer rises in the cost of crude oil, which led to lower price increases in petrol and diesel, new car sales and maintenance.
The average price of petrol at the pumps in January rose by 0.6p per 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.
The Office for National Statistics (ONS) said last year's VAT increase had an impact on prices, unlike in 2012.
A Treasury spokesman said: "Inflation fell significantly in January for the second month in a row, which is good news for family budgets. The Bank of England and other forecasters expect inflation to keep falling through this year, providing additional relief."
Howard Archer, chief UK and European economist at IHS global view said it was "good news for the economy".
"It eases the squeeze on consumers’ purchasing power and is supportive to the Bank of England’s decision to approve a further £50 billion of Quantitative Easing last week. And the fact that consumer price inflation is currently falling in line with expectations eases some of the concern that it could prove sticky over the coming months."
James Knightley, analyst at ING Bank, said CPI could slide far below target to nearly 1% as early as the final three months of 2012.
Lower agricultural prices and falling wholesale gas costs should lead to further declines in food and utility bills, he added.
He said: "Inflation expectations tend to follow actual inflation and, given that the CPI appears to be heading sharply lower, we expect inflation expectations to do likewise.
"This should further limit the risk of above-target inflation becoming entrenched, with workers unlikely, and unable given rising unemployment, to push for larger pay rises."
The fall in inflation comes after credit ratings agency Moody's put the UK's credit rating on 'negative outlook'.
Bank of England governor Sir Mervyn King had predicted inflation would fall in 2012.
Labour said the inflation fall was largely because the VAT rise had fallen out of the government's figures. Shadow treasury minister Owen Smith said: "Out of touch Ministers need to realise that the cost of living is still on the up and rising much faster than the Government’s target rate.
“While the banks are getting a tax cut this year, millions of families are facing further cuts to tax credits in just a few weeks time. This is the wrong choice and will be a huge hit to people in the squeezed middle who have already been hit hard by Tory tax rises, pay freezes, soaring rail fares and rising energy bills."