INTEREST rates could fall after latest data reveals that inflation has fallen back to the Bank of England's two per cent target for the first time since June.

Cheaper pump prices last month drove inflation back, said the Office for National Statistics (ONS).

The cost of petrol and diesel fell for the third month in a row while air fares on European and long-haul routes rose by less in December than a year ago.

Economists believe the fall in the Consumer Price Index (CPI) from 2.1 per cent in November reinforces the case for cutting interest rates - possibly as soon as next month.

Inflation has now fallen for three consecutive months after peaking at 2.5 per cent in September.

The latest data shows 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.

Retailers also helped to restrain inflation by cutting prices of goods like books and computer games.

This echoes comments from high street operators including Game Group, which reported continued price deflation on computer games software for older consoles.

But the ONS reported upward pressure on inflation from elsewhere as prices of women's clothing fell by less than a year ago, due to fewer shops launching sales early and more expensive stock.