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Inflation held steady in December as retailers cut prices to tempt shoppers.

Office for National Statistics (ONS) figures show consumer prices index (CPI) stood firm at 2.1 per cent – unchanged from November.

The retail prices index – which included mortgage repayments and housing costs – was down from four per cent in November to 4.3 per cent in December.

The largest price rises – and upward inflationary pressure - came from food, and in particular vegetables, as well as air fares rising faster than a year ago.

Inflation was held firm, however, by gas and electricity bills not rising as much as last year, smaller increases to mortgage interest payments and furniture prices.

Howard Archer, chief economist at analysts Global Insight, said: "Markedly higher food prices were countered by favourable base effects and muted utility bills.

"In addition, core inflation remained limited to 1.4 per cent, indicating a number of retailers felt they needed to contain their prices in order to encourage increasingly pressurised consumers to spend over the Christmas/New Year period."

CPI is used by the Bank of England's monetary policy committee to set interest rates – with the target of two per cent – so firm inflation increases the chances of interest rate cuts in the coming year.

"The stabilization in consumer price inflation in December keeps a February interest rate cut by the Bank of England very much on the cards, and we expect rates to be trimmed from 5.50 per cent to 5.25 per cent then," predicted Mr Archer.

He added interest rates should end the year at 4.5 per cent – despite inflationary pressures from rising fuel bills.