Drop in prices brings a sigh of relief to consumers

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The Consumer Price Index, which measures rising prices, plummeted from 4.2 per cent in December to around 3.5 per cent last month, according to City economists. It peaked at 5.2 per cent last autumn.

The sharp drop is mainly due to George Osborne's emergency rise in VAT to 20 per cent in January 2011 no longer being included in the year-on-year comparison of prices. British Gas's five per cent cut in electricity prices and steady petrol prices have also helped rein in the CPI.

Inflation is expected to carry on falling to below the Government's two per cent target by the end of the year.

Ministers hope that with salaries rising by just over two per cent, consumers will start to feel better off. Bank of England Governor Sir Mervyn King has warned that Britain is suffering the longest fall in living standards for 80 years, with take home pay this year no higher in real terms than in 2005.