Shares in Tesco closed yesterday's trading more than 4% higher after the group announced an unexpected increase in profits as wholesale food costs have eased.

Chief executive Ken Murphy said inflation throughout the food chain progressively eased during the six months to August 26 and predicted that it would continue to decelarate throughout the rest of 2023. In response, Tesco said it cut prices on 2,500 products by an average of 12% in the first half of its financial year.

"Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year," Mr Murphy said.

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"We are in a strong position to keep investing for customers, and will continue to lower prices wherever we can - doing everything in our power to make sure customers can have a fantastic, affordable Christmas by shopping at Tesco."

However, he added that people are still spreading the cost of Christmas over a longer period by purchasing frozen food months in advance, a trend that had been in place for the last couple of years. He also conceded that the financial situation for many remains difficult, with Tesco committed to doing "everything we can to drive down food bills".

In April the UK's largest supermarket retailer said it would struggle to increase profits this year, but the company posted a 14% increase in adjusted operating profit which came in at £1.48 billion in the first half. The results come after the British Retail Consortium said earlier this week that food prices edged lower between August and September for the first time in almost two years.

Official figures from the Office for National Statistics show that prices for food and non-alcoholic drinks hit a peak of 19.2% in March, the fastest annual rate since 1977. That measure has eased in recent months but remained historically high at 13.6% in August.

Tesco said it reduced its price on items such as pasta, oil and dairy products during the summer, but the cost of other staples such as chicken and potatoes continues to rise.

Sales during the six months to the end of August were 8.4% higher at £30.75bn when compared to last year, mainly because of higher prices.

However, volume sales of its Finest range of products were 4.1% as the group notched up a 13th consecutive period of net gains on customers switching to Tesco from more upmarket rivals such as Waitrose. The group added more than 150 new products to its Finest range in the first half.

It has also replacing more than 50 products at its Express stores with lower-priced alternatives including those from its own-brand range, which on average are more than 40% cheaper than branded products.

Tesco has slightly increased it full-year profit forecast to between £2.6bn and £2.7bn, up from £2.5bn previously.

“It seems Tesco [is] performing its own supermarket sweep, knocking competition out the way in the process and loading up on market share," equity analyst Sophie Lund-Yates of Hargreaves Lansdown said.

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"As a full-line retailer it maintains an edge over the likes of Lidl and Aldi where you can’t quite find some more obscure ingredients. The enormous investment Tesco’s put in to being more affordable has also helped retain and attract customers while inflation’s been running so hot."

Earlier this year Tesco committed to buying back a total of £750 million worth of shares by April 2024, of which £503m were purchased in the first half. Since launching its ongoing capital return programme in October 2021, the group has purchased a total of almost £1.6bn worth of shares.

"We continue to see the buyback programme as an ongoing and critical driver of shareholder returns, reflecting the strength of our balance sheet and our confidence in delivering strong future cash flows," Tesco said.

Shares in Tesco closed yesterday's trading up 11.1p at 270.7p, an increase of 4.28%.