UK inflation in December reached 4.2%, down from 4.8% in November, according to the Office of National Statistics.
The figures show that the Consumer Price Index (CPI), which was at its highest peak of 5.2% in September, is currently the lowest it has been in 6 months.
This is the largest fall in annual inflation since November and December 2008 in the aftermath of the recession.
Lower fuel and clothing prices formed the largest downward pressures to the change in CPI annual inflation between the final two months of last year.
Clothing and footwear prices fell 2.8% after clothing retailers slashed prices in the run up to Christmas. Petrol prices also witnessed a similar fall by 1.1 pence a litre in the same period.
The drop will help the Bank of England's quantitative easing programme next month and confirms their predictions that inflation could fall to 2% by the end of the end of 2012.
Economists believe that announcements by the 'big six' energy companies made during the last week to cut gas and electricity prices will push down inflation further. Retailers also committed to keeping prices low for reluctant spenders.
The only upward pressure came from higher charges on telephone bills on both mobiles and landlines.
Talking to the Guardian, Chris Williamson, chief economist at information provider Markit, said: "Further falls are likely in coming months, reducing the squeeze on incomes seen last year and therefore providing a much needed boost to economic growth in 2012."
The slow in inflation will come as a small comfort to cash-strapped households and hopes are that tight living standards will ease slightly by the end of the year.
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