The rate of inflation fell to 2.6% in March in the latest boost for Rachel Reeves.
The Office for National Statistics (ONS) said the headline measure of inflation - the Consumer Prices Index (CPI) fell from 2.8% in February. The Bank of England sets a target of 2%.
It is the latest in a run of better than expected economic figures including more robust growth at the start of the year than City doomsters had been pencilling in.
The inflation figure was the lowest since the 2.5% recorded in December.
The ONS said the main reasons for the fall included lower fuel prices, and softer hotel rates.
The average price of petrol fell by 1.6 pence per litre between February and March to stand at 137.5 pence per litre, down from 144.8 pence per litre in March 2024.
Diesel prices also fell by 1.6 pence per litre to stand at 144.8 pence per litre, down from 154.1 pence per litre in March 2024. Overall motor fuel prices fell by 5.3% year on year.
Food and non-alcoholic beverages prices rose by 3% in the 12 months to March , down from 3.3% in the 12 months to February.
Closely watch measures of underlying inflationary pressures all fell. Core CPI, which excludes energy, food, alcohol and tobacco, rose by 3.4% , down slightly from 3.5%, while the CPI services rate slowed from 5.% to 4.7%.
However City economists warned headline inflation will start rising again from this month, possibly to as high as 3.5%, due to higher energy and water bills.
The encouraging March inflation figures comes the day after separate ONS data showed wages still rising strongly at 5.6% suggesting living standards are rapidly improving.
Nevertheless the Bank of England is widely expected to cut interest rates again to 4.25% next month.
The Chancellor said: “Inflation falling for two months in a row, wages growing faster than prices and positive growth figures are encouraging signs that our Plan for Change is working, but there is more to be done.
"I know many families are still struggling with the cost of living and this is an anxious time because of a changing world. That is why the Government has boosted pay for three million people by increasing the minimum wage, frozen fuel duty and begun rolling out free breakfast clubs in primary schools."
The lower rate of inflation was welcomed in the City, although the March dip expected to prove a lull before a storm of inflationary pressures from this month onwards.
Jonathan Moyes, head of investment research, Wealth Club, said: “Whisper it quietly, were it not for a global trade war, the UK consumer would be in excellent shape. Wage growth is running at 5.6%, a further three interest rate cuts this year will drive mortgage rates lower, food inflation is slowing, as is eating out and travel.
“Plus with the oil price in the low 60s, energy prices look to have peaked. If the UK can escape the worst of the global trade war, it might not all be doom and gloom for the UK consumer this year, and we haven’t said that for a while.”
Paul Noble, CEO of Chetwood Bank, said: “Today’s inflation figures suggest a fragile but promising momentum – a second month of stability that hints we may be turning a corner, though not yet out of the woods.
“For many, this will feel less like a breakthrough and more like a cautious exhale, especially given the many troubling factors surrounding the economy.”
Lindsay James, investment strategist at Quilter, said: “Following a bumper reading for economic growth in February, today’s fall in inflation, slightly better than expected, will be welcome news to the government. With the jobs market weakening somewhat, and very real and present tariff threats still in play, any downward pressure on inflation will be hailed.
“Much like financial markets, however, the outlook for inflation remains very uncertain. Nobody quite knows what is going to happen next on President Trump’s tariff rollercoaster, and as such the economic environment will be volatile.
“Furthermore, there are specific inflationary pressures for the UK, with the new rates of national insurance now in place on employers and the likely upward impact this will have on prices. “
