The February figure was down from 10.4% a year ago and from January's 4%, offering hope that the Bank of England may start to reduce interest rates over the summer as inflation nears the 2% target.

However, the UK still has the highest inflation compared with the EU27 at 2.8% and US at 2.2%, reflecting a long-term trend where the UK lags behind the EU and US on tackling inflation.

Prices fell most markedly for food and non-alcoholic beverages, and restaurants and hotels, but this was partially offset by a ‘large upward effect from housing and household services’, ONS said.

ONS chief economist Grant Fitzner said: ‘Food prices were the main driver of the fall, with prices almost unchanged this year compared to a large rise last year, while restaurant and cafe prices also slowed.’

Overall prices for electricity, gas and other fuels fell by 18.2% year on year, compared with a fall of 18.4% in January.

The average price of petrol rose by 2.3 pence per litre between January and February 2024 to stand at 142.2 pence per litre, down from 148.0p a year ago. This marked a 6.5% fall in the last 12 months.

Jake Finney, economist at PwC, said: ‘We expect the disinflation process to accelerate in April as lower household energy prices drag inflation below the 2% target.

‘However, it won’t quite be ‘job done’ - with services inflation likely to take longer to normalise.

‘That matters even more now the Bank of England has adjusted its consumer basket weights to account for the fact households are spending proportionally more on services than previously.

‘Despite progress on headline inflation, we still expect rates to be held constant when the Monetary Policy Committee meets again this Thursday. The Bank of England will want to see more conclusive evidence that we have achieved a sustainable return to the inflation target before they loosen monetary policy.’

For business groups, there is concern that two years of high inflation has had a damaging impact on SMEs with cash reserves depleted and increased costs from April when the national minimum wage increases, although some signalled cautious optimism.

David Bharier, head of research at the British Chambers of Commerce, said: ’We are now two years into this inflation shock and prices have simply stabilised at a much higher level. Uncertainty for businesses remains high. Further rises in the minimum wage are likely to impact pay differentials, and the ongoing crisis in Gaza, alongside shipping disruption in the Red Sea, is a source of great instability.

‘The fundamental issues for SMEs still remain – skills shortages, a lack of infrastructure investment, and trade barriers, particularly with the EU, which all feed into GDP growth expectations of less than 1% for the coming years.’ 

Tina McKenzie, policy chair, Federation of Small Businesses (FSB) said: ‘Any easing in inflation brings relief to small firms, and the reported drop is a step towards reducing interest rates by the summer.

‘However, we mustn’t discount the cumulative damage that has been done to small businesses’ margins and cash reserves by inflation having been so high for so long.

‘Small firms ended last year with a decrease in confidence levels, indicating that this first quarter would be tricky in many respects. However, many of the key economic indicators published so far have been a slight improvement compared with 2023, giving rise to a feeling of cautious optimism.’