UK inflation dropped sharply in December, with the biggest one-month fall in the consumer prices index (CPI (Berlin: CEJ.BE - news) ) since April 2009.
CPI fell to 4.2%, from 4.8% in November (Stuttgart: A0Z24E - news) , according to the Office for National Statistics. This was in line with expectations.
It is now at the lowest level since June last year, with CPI reaching a three-year peak of 5.2% in September.
Inflation also fell in the eurozone - from 3% in November to 2.7% in December.
Michael Saunders, chief European economist at Citigroup (NYSE: C - news) , told Sky News he expects UK consumer inflation to continue to drop, reaching 2% by the end of the year.
In Britain, the retail prices index (RPI), which includes housing costs, also dropped, from 5.2% to 4.8%. The fall was slightly less than the 4.7% forecasted.
The falls were prompted by heavy retail discounting, particularly on clothing, and a supermarket price war in the run-up to Christmas. Many of the promotions began earlier than usual.
Falling gas and petrol also contributed to the drop, announced on Tuesday.
The fall in the rate of inflation is likely to reinforce arguments in favour of holding interest rates at historic lows of 0.5%, with some predicting they will be held there until 2016.
Earlier this month, the British Retail Consortium (BRC) said shop price inflation fell to 1.7% in December - down from 2% in November - its lowest level for 16 months.
The rate of inflation for non-food items was at a two year low of 0.3%, and significantly down on 0.8% in the previous month.
This was driven by price cuts on electrical items, clothes and footwear, with many items cheaper than they were a year ago.
However, the BRC said food prices rose 4.2%, which was slightly higher than November's 4% increase, despite the high level of supermarket discounts.
A supermarket price war broke out after Tesco (LSE: TSCO.L - news) announced a £500m price-cutting campaign, Asda (NYSE: WMT - news) guaranteed to be 10% cheaper than its rivals and Sainsbury (LSE: SBRY.L - news) 's launched its own brand price matching scheme.


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