The latest official figures show that inflation fell from 4.8% to 4.2% between November and December 2011.
The Office for National Statistics (ONS) has revealed that the Consumer Price Index (CPI) fell to 4.2% last month, a welcome relief for households who saw the cost of clothing, alcohol and gas fall at the end of the 2011.
An ONS report suggested that, ìThe last time there was a larger fall in annual inflation was between November and December 2008.î
This is the third consecutive month that inflation has fallen, spurred on by the early high street retail discounts.
The Retail Price Index (RPI) also fell from a massive 5.2% in November to 4.8% in December. As inflation cools off, consumers can enjoy a little more disposable income in their pockets.
The only increase in prices came from landline and mobile phone charges for CPI. The reduced price of petrol, gas and clothing drove down the rate of inflation.
The cost of alcohol and tobacco fell in December, despite the annual Christmas stock pile from consumers. Falling by 1.5%, this marks a record reduction between any two consecutive months. The price of wine fell by a massive 3.3% and spirits fell by a further 4.4%.
The price of food and non-alcoholic beverages, however, increased as Christmas vegetables were in high demand.
The cost of transport also increased significantly, by 2.2% between November and December. This is down to a 40.9% rise in the cost of airfares over the seasonal period.
Despite this inflation dip, ërealí wages are still well below the current rate of inflation. Basic taxpayers will need a rate of 5.6% to see any benefits on savings in real terms. This figure increases to a massive 7.01% for higher rate taxpayers.
High inflation combined with low interest rates has made it increasingly difficult for savers to make any real returns on their pots of cash.
It could be worth shopping around to find the best savings deals as inflation starts to inch closer to the target rate of 2%.
Compare savings with Money Expert.