Inflation tumbled at a record pace in October to 4.5 per cent, down from the 16-year peak of 5.2 per cent in September, official figures show.

A sharp fall in transport costs, coupled with lower fuel and food prices, helped to push down the Consumer Price Index to the lowest rate since July.

Core inflation, which excludes volatile energy and food prices, also fell from 2.2 per cent to 1.9 per cent, indicating that retailers are cutting prices in a bid to attract consumers into the shops as the British economy head towards recession.

The bigger-than-expected fall in inflation helps to explain the Bank of England's dramatic 1.5 per cent rate cut earlier this month as, until now, the rate-setting Monetary Policy Committee has been concerned about entrenching inflation in the economy if it cuts rates too swiftly.

Analysts say that the figure paves the way for more rate cuts.

Howard Archer, chief UK and European economist at IHS Global Insight, the economic consultancy, said: "This reinforces the belief that the Bank of England will cut interest rates sharply further in December as it tries to limit the length and depth of the recession."

The Bank expects inflation to fall sharply towards its 2 per cent target, and forecasts that it could drop below this level to as low as 1 per cent next year.

Mr Archer forecasts that it will fall to 0.5 per cent, while Jonathan Loynes, of Capital Economics, said that deflation could be in the cards as inflation dips below zero.

"Not only is inflation in the UK still dead but deflation is about to be reborn," he said.

Falling inflation and deflation can be damaging for an economy as consumers are tempted to wait before making purchases to let prices fall further.

This hits retailers and producers, causing sales and output to drop and can lead to further cost cutting and job cuts. Just as an inflationary spiral is damaging, a deflationary spiral can also be toxic for the economy.

Brendan Barber, General Secretary of the TUC, said that while it was good news that inflation was falling, the drop in prices is "a sign of how rapidly the economy is shrinking." He called on the Government to do more to get banks lending again, giving warning that a failure to do so would mean that further rate cuts would do nothing to help save jobs and businesses.

Retail price inflation, on which many wage deals are based, fell to 4.2 per cent from 5.0 per cent in September.

The monthly drop in the inflation rate is the biggest since the series began in 1997.

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