Shop-price inflation fell dramatically to 0.5 per cent in December, the fastest rate in two years as retailers slashed prices and the VAT reduction took effect.

The British Retail Consortium (BRC) said non-food items experienced deflation of 2.4 per cent over the month, compared to inflation of 0.4 per cent in November.

Electricals, books and home entertainment products were all around five per cent cheaper than last year.

However, food prices rose by 6.2 per cent, although this was at a slower pace than in November, when food prices rose by 7.1 per cent compared to last year.

Food price inflation peaked at ten per cent in August, on high commodity costs, and has been falling since.

Stephen Robertson, BRC director general said: “Goods in every category were much cheaper – both compared with the previous month and a year ago.

“It’s clear retailers are holding down shop prices at a time when many of their own costs are increasing.”

The BRC expects food inflation to continue to fall in 2009 as operating costs fall and the recession prompts price wars between supermarkets.

Tesco has already announced £100 million of discounts on 3,000 products and a new advertising campaign to highlight its price credentials this week.