Inflation fell below the Bank of England's target for the first time in two years in January thanks to the new cap on energy prices.

Figures from the Office for National Statistics show the Consumer Prices Index fell to 1.8 per cent last month, the largest drop since 2016, from 2.1 per cent in December.

January inflation missed economists' expectations and undershot the central bank's target of two per cent.

Sterling held firm after the news, at 1.289 US dollars and 1.138 euros.

Inflation was dragged down by lower electricity, gas and petrol prices between December and January, which was partially offset by lower air fares.

The main driver for inflation was the new energy price cap on standard variable tariffs recently introduced by energy watchdog Ofgem.

Mike Hardie, head of inflation at the ONS, said: "The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year.

"House prices continued to grow, albeit at the lowest UK annual rate since July 2013, with growth in the North East and London lagging behind Northern Ireland, Wales and the West Midlands."

At the pumps, motorists had lower fuel costs last month, with petrol down by 2.1p per litre on the month to 119.6p. Diesel also fell by 2.4p to 129.5p.

Yael Selfin, chief economist at consultancy KPMG UK, said January's inflation data gives Bank policymakers 'ample room' to wait before they raise interest rates again as Britain's leaves the European Union.

"In the current climate of heightened uncertainty in regards to the Brexit process, businesses will benefit from a supportive monetary policy.

"Waning UK business investment, and potential short-term financing difficulties for many SMEs in the event of a no-deal Brexit, will require the Bank of England to keep rates low this year, and the latest inflation figures provide the Monetary Policy Committe) with a mandate to do that."