Chancellor Jeremy Hunt raised hope of new tax cuts and lower mortgage rates on Wednesday as inflation fell faster than expected.
UK inflation dropped to the lowest level in more than two years as the growth in food prices eased for cash-strapped households.
The Office for National Statistics said that Consumer Prices Index inflation stood at 3.4 per cent in February - down from four per cent in January and the lowest level since September 2021.
Most economists had been expecting inflation at 3.5 per cent last month.
Inflation is now closer towards the Bank of England's two per cent target and comes ahead of the latest interest rate decision on Thursday.
Responding to the figures, Chancellor Jeremy Hunt insisted that the Government’s “plan is working” to get the economy growing, boost living standards and cut taxation.
"Inflation has not just fallen decisively but is forecast to hit the two per cent target within months,” he said.
"This sets the scene for better economic conditions which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work - but only if we can do so without increasing borrowing or cutting funding for public services."
The sharper than expected fall in inflation will be welcome news for Rishi Sunak who is due to meet the 1922 committee of backbench Tory MPs on Wednesday afternoon amid disquiet over this leadership.
But Shadow chancellor Rachel Reeves said "prices are still high" despite the latest fall in the rate of inflation.
"After fourteen years of chaos and uncertainty under the Conservatives working people are worse off," she added.
"Prices are still high, the tax burden is the highest it has been in seventy years and mortgage payments are going up.”
The Bank of England’s Monetary Policy Committee (MPC) is expected by some economists to keep rates for now on hold at 5.25 per cent, but the steep fall in the CPI is likely to reinforce expectations that the Bank is moving closer to cutting rates later this year.
Mr Hunt added on the BBC: “As inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates, that brings down mortgage rates, that makes a very big difference.
“It’s far too early to know whether we will have another fiscal event before the election but what I would say is that what you can see is the difficult decisions the Government has taken over the last year are paying off.”
Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “We continue to think that CPI (inflation) outturns over the coming months will convince the MPC that monetary policy does not need to be quite as “restrictive” as it is currently, though it looks like a toss-up whether the Committee will opt to cut Bank Rate for the first time in June or August.”
James Smith, an economist at ING, said: "A 12 per cent fall in household energy bills due in just under two weeks, should take headline inflation below two per cent in either April or May.
"It's likely to stay below the Bank of England's target for much of 2024, especially when you consider we may well see another double-digit percentage point fall in energy bills in July when the regulator again updates the household price cap."
He is pencilling in the first rate cut in August, or possibly as early as June.
Grant Fitzner, chief economist at the ONS, said: "Inflation eased in February to its lowest rate for nearly two-and-a-half years.
"Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and cafe price rises also slowed.
"These falls were only partially offset by price rises at the pump and a further increase in rental costs."
