U.K. inflation fell below the Bank of England's (BoE) target in January to its lowest annual level since November 2009.
Consumer prices rose 1.9 percent year-on-year last month, below the 2 percent target set by the central bank. Month-on-month prices declined 0.6 percent.
The fall in the rate resulted from price movements for recreational goods and services, furniture, household goods, tobacco and alcoholic beverages, according to the Office for National Statistics which published the data.
It added that price movements for recording media (notably DVD films) and recreational and cultural services contributed to the downward trend, with a notable contribution from admissions to cultural events – which decreased to the winter off-peak admission rates at a range of U.K. attractions.
Geoffrey Yu, FX strategist at UBS told CNBC he believes the Bank of England can be "quite happy with itself" as its cautious approach to rising benchmark interest rates can now be justified with the weaker inflation.
Bank of England Governor Mark Carney last week unveiled the "next phase" of forward guidance - which initially tied the bank rate to the country's unemployment rate after a sharp fall in jobless numbers took the central bank by surprise. Since its independence in 1997 the BoE's main task has been to manage inflation, but since the financial crisis, it has been taking a broader role in bolstering the country's economy.
The BoE has now said it would look at a broader range of measures of slack in the economy than just the unemployment rate, adding that it was in no rush to raise rates. Critics warned the new guidance left Britain exposed to inflationary pressures.
Yu told CNBC Tuesday that currency trading with sterling would be "very interesting" with the central bank trying to gauge how fast the economy is recovering. The price of the pound plunged to close to $1.666 after the data after weakening for the most of the morning. Sterling started the session at $1.672.
Yu said rising house prices and equities - which aren't included in the consumer prices data - showed resilience in the U.K. economy.
"Real returns in the U.K. right now are outperforming compared to the euro zone," he said.
Alex Edwards, head of the corporate desk at UKForex said that the data was a great excuse for investors to unwind some long sterling positions that have built up over the last week.
(Read More: Bubble alert? UK house prices rise to 6-year record)
"We're likely to see (sterling) remain on the back foot for the rest of the day, but with U.K. unemployment and MPC (monetary policy committee) minutes due tomorrow morning, we think we'll see support come in at ($)1.66 in the near-term," he said in a research note.
The British economy recorded its fastest annual growth rate in 2013 since the start of the financial crisis, with full-year growth up 1.9 percent from just 0.3 percent in 2012.
While this marked the highest annual growth rate since 2007, growth in the fourth quarter slowed to 0.7 percent, down from 0.8 percent in the previous three months, according to data released in January.
—By CNBC.com's Matt Clinch; Follow him on Twitter