The Consumer Price Index (CPI) rate of inflation fell sharply to 0.5% in the year to December 2014, from 1% in November 2014, official figures show.
This is the joint lowest CPI rate on record and the lowest since May 2000. The Office for National Statistics said the low inflation was driven by falling food and fuel prices.
The Bank of England Governor, Mark Carney, will now have to write a letter of explanation to George Osborne. The Governor must write to the chancellor whenever inflation falls more than 1% point below the target rate. CPI inflation is now 1.5% below the Bank of England's 2% target rate.
Business leaders broadly welcomed the news, despite some analysts warning about the possibility of entering deflation in the months ahead.
James Sproule, Chief Economist at the Institute of Directors said it was "good news for the vast majority of businesses and households".
James Kern, Chief Economist at the British Chambers of Commerce said that concerns over falling inflation were "grossly exaggerated". He went on to say, "These figures show that inflation in the services sector, which accounts for some 80% of the UK economy, remains persistently above 2%. The main factor which counts for the low level of goods inflation, the fall in energy and goods prices, is positive as it boosts consumers' disposable income and makes it easier for businesses to devote resources to investment."