The annual rate of inflation has hit a 15-year low as oil costs continue to fall and supermarkets engage in a price war.
The Office for National Statistics (ONS) measured consumer price inflation (CPI) at 0.5% in December - its joint lowest level on record - slowing from a rate of 1% in the previous month.
The figure represents a further easing in the cost of living as wage growth is boosting consumer spending power and easily outpacing rises in costs.
The ONS said falling petrol prices and lower gas and electricity bills compared with a year earlier were the biggest factors pushing inflation down last month.
The cost of Brent crude is currently at six-year lows - trading on Tuesday at $45-per-barrel.
It represents a fall of more than half since last summer on a supply glut and fears for world economic health.
Flat household gas and electricity tariffs over the month - compared to a period last year when they were raised sharply - also made a major contribution to the drop in CPI.
Food and non-alcoholic beverages were 1.7% cheaper in December than the same month a year ago - driven by the intense price war between the major supermarkets under pressure from discounters Aldi and Lidl.
Core vegetable costs were over 7% lower.
Motor fuels fell 10.5% year on year with the price of a litre of petrol tumbling 13.6p between December 2013 and last month, with diesel 15p lower.
The plunge in CPI to below 1% triggers a letter of explanation from Bank of England governor Mark Carney to George Osborne because it is more than 1% off the Bank's 2% inflation target.
But the Chancellor is unlikely to be worried that, ahead of May's election, prices are falling following a tough six years for voters in the wake of the financial crisis.
Price growth could ease further this month as energy firms begin to cut standard tariffs - with no sign of a rebound in oil and gas costs.
The Bank had previously said it expected CPI to fall below 1% and remain there for months to come.
But the sharpness of the decline brings the UK uncomfortably close to the scenario in the eurozone, where there are fears of a damaging deflationary spiral after inflation fell to -0.2%.
Deflation, which dogged Japan for more than 25 years, is seen as dangerous economically because consumers and businesses hold off on purchases on hopes goods and services will be cheaper in future.
Mr Osborne said: "Inflation is at its lowest level in modern times.
"We have family budgets going further and the economic recovery starting to be widely felt.
"We will always remain vigilant that we have lower inflation for the right reasons and today is yet further proof our long term plan is working."
Shadow Treasury minister Shabana Mahmood said: "Plummeting global oil prices are the reason why the rate of inflation is falling here in Britain.
"But wages continue to be sluggish and the squeeze on living standards since 2010 means working people are £1,600 a year worse off under this government."
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