Mixed reports about December's trading performance from the leading high street shops and department stores point to a difficult year ahead for retailers in the West Midlands, PricewaterhouseCoopers said.

The firm said retailers may be forced to slash prices in order to tempt cautious consumers over the threshold.

The warning comes as the British Retail Consortium said stores tempted Christmas shoppers with record levels of food and drink promotions during December.

Around 30 per cent of all grocery lines were discounted by retailers, well up on normal levels in the 20 per cent range, the monthly study carried out by Nielsen found.

With retailers facing tough trading conditions, stores slashed the cost of alcohol in particular to attract shoppers.

The raft of deals resulted in a fall in monthly food inflation to 0.1 per cent last month, down from 0.7 per cent in November, the BRC said. Annual food inflation also eased to 3.8 per cent last month, down from 4.3 per cent in November.

Soaring food prices have been the main driver of inflation on the high street, with prices of non-food items actually falling every month last year.

Mike Watkins, of Nielsen, said: "While recent food price inflation, albeit stabilising, will have taken the edge off sales in some food and drink categories, retailers have responded with their highest ever levels of promotions in food shops."

Overall retail prices during December were one per cent higher than a year ago, well below the current inflation rate of 2.1 per cent.

BRC director-general Kevin Hawkins said that paved the way for an interest rate cut from the Bank of England today.

He said: "Shop prices rose modestly in December and well below overall inflation as retailers discounted to tempt cash-strapped customers in.

"Customers are being squeezed by a range of rising costs but little of that is coming from shop prices, leaving the way clear for a reviving rate cut from the Bank of England."

Howard Archer, economist at Global Insight, said the BRC survey showed consumers were reluctant to spend over the Christmas and New Year period despite significant discounting.

He said: "This reinforces our belief that consumer spending will be significantly softer in 2008 as consumers are increasingly pressurised by muted real disposable income growth, increased debt levels, a markedly softer housing market, tighter lending practices and the still significant overall rise in interest rates since August 2006."

Both fresh and ambient food saw the rate of inflation ease in December, more so in the case of ambient products.

Fresh food inflation slowed to 4.5 per cent last month, from 4.8 per cent in November, while ambient prices rose 2.8 per cent in December compared with 3.5 per cent the month before.

The BRC said with commodity prices set to increase further this year, fresh food items were unlikely to come down in price "for some time yet".

The survey showed prices of clothing, footwear, furniture, DIY and electrical goods all fell in December compared to the previous month.

But a four per cent rise in prices of books and home entertainment saw non-food items over-all going up 0.2 per cent month-on-month last month.

Andy Lyon, retail expert at PwC in the West Midlands, said: "Christmas trading performances have been a mixed bag for retailers across the Midlands.

"Many top end or luxury retailers are reporting a bumper Christmas, whereas those at the mid-to-lower end are reporting more variable trading volumes, with some reporting a dip in like-for-like sales."