UK CPI inflation eased further at the start of the new year. In January, consumer prices dropped by 0.5% M/M, pushing the annual rate down to 3.6% Y/Y (from 4.2% Y/Y in December), the lowest level since November 2010. The details show that downward price pressures were mainly based in fares and travel costs (-5.6% M/M), clothing & footwear (-5.1% M/M), household goods (-3.1% M/M), seasonal food (-1.2% M/M), leisure goods (-0.4% M/M) and food (-0.2% M/M). Prices of alcohol (1.3% M/M), personal goods & services (0.3% M/M), catering (0.2% M/M), housing (0.1% M/M) and tobacco (0.1% M/M) rose in January. Core CPI, which excluded volatile energy and food prices, dropped lower too, from 3.0% Y/Y to 2.6% Y/Y, reaching the lowest level since September 2010. The sharp decline in January inflation was partly due to the increase in VAT in January 2011, which fell out of the twelve-month comparison. Although UK inflation is certainly easing, CPI remained more than one percentage point above the 2% target, which required BoE Governor King to write an open letter to the Chancellor. In his open letter, King said UK inflation is likely to fall back to around the target by the end of 2012, although the pace and extent of the fall in inflation remain highly uncertain. Governor King continued to stress that the MPC stands ready to react as necessary to changes in the balance of risks to the inflation outlook.