Gordon Brown, the Chancellor, received a welcome economic boost today as official figures showed that inflation has fallen for the third month in a row - to his target level of 2.0 per cent.

According to the Office for National Statistics, the Consumer Price Index (CPI), the main domestic measure of inflation, fell by 0.1 per cent in December, from its 2.1 per cent level the previous month.

The drop, after inflation peaked at 2.5 per cent in September, brings price rises into line with the Bank of England’s 2.0 per cent target and has fuelled hopes the Bank's Monetary Policy Committee will opt to cut interest rates at its next meeting in February.

Howard Archer, chief UK economist at Global Insight, said: "This very much keeps the door open for an interest rate cut in February, although the Bank of England may still prefer to wait while it monitors the strength of consumer spending and wage settlement levels early in 2006."

National Statistics reported that the fall was largely the result of a drop in transport costs, as the price of petrol and diesel fell for the third month in a row. Today’s figures show that the average price for ultra-low sulphur petrol dropped by 3p a litre last month to 87.1p, compared with a 2p decline a year earlier.

Air fares on European and long-haul routes also rose by less in December than a year ago. Smaller seasonal increases in air fares also appear likely after British Airways said that the aviation industry continued to squeeze prices to attract passengers in the run-up to Christmas.

There was downward inflationary pressure in the retail sector, with ONS reporting that the headline rate of retail price inflation (RPI) – which includes mortgage interest payments – fell to 2.2 per cent, compared with 2.4 per cent the previous month.

The underlying rate (RPIX), which does not include mortgage payments, fell to 2.0 per cent in December, against 2.3 per cent in November.

Retailers helped to restrain inflation by cutting the price of goods ranging from books to computer games, ONS said. This echoes comments from high street operators including Game Group, which have reported continuing price deflation on computer games software for older consoles.

In their post-Christmas trading updates, booksellers such as Ottakar’s reported intense competition from supermarkets and online booksellers, which have been offering promotional deals on bestsellers.

In addition, furniture and furnishings retailers raised their prices in December by less than they had done in the same month a year ago.

But the official figures show upward pressure on inflation from elsewhere on the high street, where the price of women’s clothing fell by less than a year ago. This was due to shops delaying the start of their sales, while placing more expensive stock on their shelves.

The figures come a day after ONS revealed that manufacturers were struggling to pass on higher raw material costs to their customers, having to opt instead to suffer a fall in profits.

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