Shop prices grew at their slowest pace in 16 months in December as retailers slashed prices for electrical goods, clothes and footwear in the run-up to Christmas, a survey showed on Wednesday.
The British Retail Consortium said shop price inflation fell last month to 1.7 percent year-on-year from 2.0 percent in November, well below a peak of 2.9 percent reached in June.
Non-food inflation dropped to a two-year low of 0.3 percent from 0.8 percent in November, and is likely to show year-on-year falls in 2012 when the effect of 2011's rise in sales tax drops out of the annual comparison, the BRC said.
Stiff competition throughout the (retail) sector resulted in a blizzard of promotions and discounts ahead of Christmas, said Stephen Robertson, the BRC's director general.
Consumers are likely to rein in spending in the wake of Christmas and price will remain the main battleground between retailers.
Food price inflation rose to 4.2 percent from 4.0 percent in November, though this was below levels earlier in 2011, and the BRC said it expected further falls in 2012 as the effect of lower commodity prices and discounting fed through.
Food retailers' gross profit margins had fallen to 5.7 percent from 8.6 percent between 2006 and 2011, the BRC added.
Easing high street inflation will be a relief to the Bank of England, which based its October decision to start a second round of quantitative easing on forecasts that inflation would fall sharply in 2012.
Consumer price inflation - which covers a much broader range of goods and services than the BRC measure - is currently more than double its 2 percent target.
The Bank will announce its January policy decision on Thursday.
(Reporting by Olesya Dmitracova; Editing by Catherine Evans)