The annual rate of inflation fell to 2.3 per cent in January from 2.6 per cent in December.

Prices were down 0.8 per cent in the month, compared to a fall of 0.5 per cent in the same month last year. The general consensus is for a 2.5 per cent inflation rate for the year.

The main price changes in January were decreases in clothing and footwear and household durable goods, which economists said was due to the winter sales. Clothing and footwear fell 15 per cent and transport costs fell 1.8 per cent because of decreases in petrol and airfares.

However, there was increases in bus and rail fares, refuse charges, toll-bridge charges and hospital charges

Mr Alan McQuaid of Bloxhams said these price increases can be indirectly blamed on the Government, "indicating that inflation could be significantly lower still, but for its intervention".

Mr Pat Delaney, director of the Small Firms Association (SFA) said water, waste, electricity, gas and fuel are now the key drivers of inflation.

"The grossly inflated cost and inefficient delivery of local authority services must be tackled," he said.

The rate of inflation in the services sector remains high. Last month it was running at 4.1 per cent year on year. It has been running at more than 4 per cent for the past three months.

Davy Stockbrokers said that services in general were under pressure to pass on wage increases, which on average across the economy are running at 6.5 per cent annually.

The EU Harmonised Index of Consumer Prices fell 1 per cent in the month, compared with a 0.6 per cent fall in January 2004.