Official figures show that the UK's annual rate of inflation dropped to its lowest level since April last year in January, as fuel prices fell at the fastest pace on record.

The key Consumer Prices Index (CPI) measure of inflation dropped to 3% from 3.1% in December, the Office for National Statistics (ONS) said. The ONS said falling car and transport prices also acted as a drag on inflation.

But the fall was far smaller than expected by economists as January sales failed to record the same level of heavy discounting as last year.

The ONS said retailers cut prices by less after unusually heavy discounting in December 2008, while it added that alcohol prices were also raised.

Retail Prices Index (RPI) inflation - which includes mortgage costs - showed a much larger fall, plunging from 0.9% in December to 0.1% in January, marking the lowest level for nearly 49 years.

Economists predict that RPI will soon sink into negative territory as the recession tightens its grip. It is also feared that CPI - the official measure of inflation - could turn negative in what would effectively be classed as deflation. The Bank of England warned in its grim quarterly forecast last week that the UK would only narrowly avoid deflation.