The rate of inflation fell to a 14-month low last month and is expected to hit the Government's 2% target by the end of the year in a further sign that the crippling consumer spending squeeze is loosening its grip.

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.

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.

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 - but he warned this could have a negative impact on wage growth.

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."