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Factory gate inflation fell to 5.1 per cent in November.

Inflation for materials and fuel going into factories was down by half – from 15.4 per cent in October to 7.5 per cent in November - with the falling oil prices aiding manufacturers.

Output prices fell 0.7 per cent in November, the fourth consecutive fall.

Since July, input price inflation has fallen from 34.1 per cent to 7.5 per cent and the level of
input prices has fallen by 13 per cent.

The figures provide greater evidence UK inflation is now dropping – after recent highs – and could allow the Bank of England to cut interest rates further.

Howard Archer at Global Insight explained a whole raft of factors were pushing down inflation – including the VAT cut, falling oil prices and the recession.

"These factors seem certain to easily outweigh the inflationary impact of the very weak pound," the economist said.

"Indeed, it seems highly likely that consumer price inflation will move back below the Bank of England's two per cent target level in the early months of 2009 and will turn negative during the second half of the year."

As such, he predicted a 0.75 per cent interest rate cut in January at least.

"We expect interest rates to fall to a low of 0.50 per cent in the second quarter of 2009 and then stay there for the rest of the year," Dr Archer said.

"However, it is far from inconceivable that interest rates could come all the way down to zero."