What does low inflation mean for you? As inflation falls to two-year low of 1.8%

The drop to 1.8 per cent in January came thanks to a fall in prices of electricity, gas and other fuels, the Office for National Statistics (ONS) said.

This compares to an inflation rate of two per cent in December, meaning that rises in pay are now outpacing inflation.

Ofgem's energy price cap, which came into effect from January 1, also helped drive down inflation, the ONS said.

What is inflation?

Inflation is defined as a general increase in prices and fall in the purchasing value of money.

The prices of goods and services are bound to increase over time, yet the rise should be gradual or the UK economy will suffer.

If inflation is 10 per cent, a handbag costing £50 will be priced at £55 in a years time.

What does low inflation mean for your finances?

January's drop in inflation is good news for households who have been bearing the brunt of rising prices.

Previous rises have been fuelled by the weak pound putting pressure on households with those with the lowest incomes hardest hit.

January’s fall will ease the pressure on squeezed households and reduces the likelihood of another interest rate rise.

Low inflation and low interest rates reduce the cost of borrowing, which encourages people to take loans and spend.

Low inflation is also good news for savers who will see their pot increase by more than if inflation was higher.

In fact, there are now 245 savings accounts that match or beat the current inflation rate, more than double last month's total, according to rate monitoring firm Savings Champion.

But Brits should be wary of spending too much of their money, according to experts.

Martin Lane, managing editor of comparison website Money.co.uk, said: "With inflation unexpectedly falling to 1.8 per cent, it may seem like a great time to splash your cash."

"However, with Brexit looming and exchange rates for the pound still relatively weak, it’s probably best to be reserved about your spending," he added.

"Use the good times to prepare your finances for when they aren’t so great.

"Create a budget and spend 30 minutes looking at where you could make savings, switch your energy, change where you do your weekly shop to a discount store and look to see if you can make savings by switching your debts around."

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