INFLATION has fallen to a two-year low, giving relief to cash-strapped consumers.

The drop to 1.8 per cent in January came thanks to a fall in prices of electricity, gas and other fuels, the Office for National Statistics (ONS) said.

 Inflation figures revealed a drop in living costs in January

PA:Press Association

Inflation figures revealed a drop in living costs in January

This compares to an inflation rate of two per cent in December, meaning that rises in pay are now outpacing inflation.

Ofgem’s energy price cap, which came into effect from January 1, also helped drive down inflation, the ONS said.

What does low inflation mean for your finances?

Inflation is defined as a general increase in prices and fall in the purchasing value of money.

If inflation is 10 per cent, a handbag costing £50 will be priced at £55 in a years time.

So January’s drop in inflation is good news for households who have been bearing the brunt of rising prices.

Previous rises have been fuelled by the weak pound putting pressure on households with those with the lowest incomes hardest hit.

Today’s fall will ease the pressure on squeezed households and substantially reduces the likelihood of another interest rate rise.

Yet Brits should be wary of spending too much of their money, according to experts.

Martin Lane, managing editor of comparison website, said: “With inflation unexpectedly falling to 1.8 per cent, it may seem like a great time to splash your cash.”

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“However, with Brexit looming and exchange rates for the pound still relatively weak, it’s probably best to be reserved about your spending,” he added.

“Use the good times to prepare your finances for when they aren’t so great.

“Create a budget and spend 30 minutes looking at where you could make savings, switch your energy, change where you do your weekly shop to a discount store and look to see if you can make savings by switching your debts around.”

The Bank of England has kept interest rates the same – holding them at 0.75% in light of Brexit uncertainty

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