Tesco has said it is on track for bigger-than-expected profits this year after record sales over the key Christmas period.

Bosses at the supermarket giant said its growth was boosted by investment to keep prices low, as it has sought to stop shoppers switching to fast-growing German discount rivals Aldi and Lidl.

The retailer said it has cut “nearly 2,700 prices” as part of this strategy to attract customers who have faced a surge in the cost of living.

Ken Murphy, chief executive of the retailer, said he expects food inflation to “continue to moderate” through the rest of the year as energy prices become a tailwind.

However, he said there is still expected to be some inflationary pressure from labour costs in the food supply chain.

He highlighted that the commodity price of some products, such as potatoes and some meat, has not yet reduced despite overall inflation in the sector slowing significantly.

The boss however cautioned that disruption caused by attacks from rebels near the Red Sea could lead to more inflationary pressure.

“Having to go around Africa to get to Europe extends shipping times, constrains shipping space and moves up shipping costs,” Mr Murphy said.

“It could inflate the cost of some items but we just don’t know at the minute and don’t know how long the situation will last.”

On Tuesday, Tesco said like-for-like retail sales across the group rose by 6% over the six weeks to January 2024, compared with the same period a year earlier.

In the UK, sales across it stores grew by 6.8% over the Christmas period, with the company hailing a sharp rise in demand for its Finest premium range of food and drink products.

Tesco chief executive Ken Murphy
Chief executive Ken Murphy said Tesco is starting the new year ‘in great shape’ (Ben Stevens/Parsons Media/PA)

It came as the company also reported that like-for-like retail sales grew by 6.6% over the previous 13 weeks, the quarter to November 25, as it was boosted by strong growth in its UK and Ireland shops.

Tesco said it now expects a retail-adjusted operating profit of £2.75 billion for the year, up from a previous range of between £2.6 billion and £2.7 billion.

Mr Murphy said: “The Tesco team has worked harder than ever to help customers celebrate this Christmas, with our strongest ever range of great value, fantastic quality food.

“Our powerful combination of great value, quality, availability and service means that we head into the new year in great shape to keep delivering for customers.”