Inflation tumbled below the Bank of England's (BoE) 2 per cent target in July for the first time in more than a year.
The Office for National Statistics (ONS) said consumer prices fell 0.6 per cent last month, pushing the annual rate down to 1.9 per cent - its lowest since March 2006 - from 2.4 per cent in June.
The pound slid and interest rate futures jumped as investors bet the BoE would not need to raise interest rates again this year as had been previously expected.
The BoE signalled last week in its quarterly inflation forecasts that, after five increases since last August, one more hike to 6 per cent may be needed to bring inflation back to target in the medium term.
However, policymakers did not have access to July's data then and may be surprised to see such a sharp easing in price pressures.
The ONS said the biggest downward effect on prices last month came from food and non-alcoholic drinks, which took 0.2 percentage points off the annual rate, due to a supermarket price war. Furniture and fuel costs also had a large downward effect on inflation.