UK inflation is tipped to show a sharp fall when official figures for December are released later.
Consumer price inflation fell sharply in December to an annual rate of 3.1% from November's figure of 4.1%.
Analysts polled by Reuters expect the Consumer Prices Index to have dropped sharply for the month, to an annual rate of 2.7%, from 4.1% in November.
The biggest factor was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report on 24 November, the Office for National Statistics said.
The headline Retail Prices Index rate of inflation is predicted to drop below 1%, from November's annual rate of 3%.
The headline rate of inflation measured by the Retail Prices Index (RPI) fell to 0.9% from November's rate of 3%.
Many economists expect the inflation rate to continue to slide in 2009, prompting fears of deflation.
RPI takes account of mortgage costs, which also fell following December's cut in interest rates.
A reduction in VAT combined with significant sales last month from major retailers are both key reasons for the expected fall in inflation.
The fall in RPI was the biggest for more than 28 years.
"The run-up to Christmas was characterised by increasingly desperate retailers offering larger and larger discounts to tempt shoppers into stores," said Matthew Sharratt, an economist at Bank of America.
High Street discounting
While the Office for National Statistics data is tipped to show the CPI rate above the government's target of 2%, there are growing concerns that the slowdown will prompt deflation.
Falling petrol prices and discounting in shops before Christmas also helped reduce the rate of inflation.
Measures
'Wide-ranging' views had been held on inflation figures, economist James Knightley has said
Government attempts to counter the downturn have had a limited impact, with credit remaining expensive or difficult to obtain, jobless numbers rising and manufacturing slowing down.
The biggest discounts were in clothing and footwear, with prices falling 10.3%.
A government plan set out on Monday to counter the economic downturn by encouraging lending met with criticism amid concerns that more needed to be done.
Transport costs also fell as a result of falling petrol and diesel prices, although air fares and coach fares were both up more than they had been in December 2007.
Prime Minister Gordon Brown said the scheme, which centres on state insurance for banks, was essential to help protect jobs.
The CPI figure is still well above the government's target rate of 2%, but has fallen sharply from the peak of 5.2% in September.
UK interest rates stand at their lowest level in the Bank of England's 315-year history, after they were cut to 1.5% earlier this month.
Many economists had expected it to fall even further, with a consensus of about 2.7%.
Recent economic indicators paint a negative view of what is to come.
Deflation risks
The Ernst & Young Item Club, for example, has predicted that the number of those out of work in the UK would pass 3.25 million by the end of 2010, and hit 3.4 million in 2011.
Food and energy prices are propping up inflation, with both still above their levels from this time last year.
Food prices
But with oil prices so low, gas and electricity prices are expected to fall in the coming months as are food prices.
Forecasts that inflation will have slowed in December - and continue to do so for the coming months - mark a sharp reversal from last year.
The falling rate of inflation has raised concerns about the prospect of deflation later this year.
Rising inflation had been a major concern in 2008, spurred by high energy and food prices, causing the CPI to reach 5.2% in September.
"Inflation is most definitely yesterday's story," said Graeme Leach, chief economist at the Institute of Directors.
Figures released on Monday from Verdict Research showed that food prices, after years of deflation, rose sharply for 2008.
"Unless the huge stimulus from the VAT reduction, record low interest rates, a falling pound and the collapse in the oil price begin to take effect soon, the UK will be staring deflation in the face."
"But the good news for consumers is that the pace of food inflation is easing," said Verdict.
Deflation is a problem because whatever stimulus measures are put in place, consumers may be put off making any purchases if they believe that prices will be lower in the future.
