TESCO’S revival under chief executive Dave Lewis continued in the first quarter, with like for like sales rising 2.3 per cent in the UK in spite of gruelling competition in the grocery market.

It was the grocery giant’s strongest quarter on quarter performance in the UK for seven years.

But analysts warned that challenging times lie ahead as Brexit-sparked inflation and the pressure on real-terms earnings continue take their toll on consumer spending. Investors were initially cheered on the update before news of Amazon’s $13.7 billion bid for US-based Whole Foods broke, which led to fears the online giant could knock Tesco off the UK’s top grocery spot. Tesco shares closed down nearly five per cent at 171.1p.

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Tesco, which has around 250 stores in Scotland, reported its sixth consecutive quarter of like for like sales growth yesterday, boosted by a 2.7 per cent hike in food sales. It underlined its continuing recovery since its nadir of 2014, when the retailer was rocked by an accounting scandal and saw profits plunge amid the competition brought by Aldi and Lidl.

Mr Lewis, who joined from Unilever in September 2014, has won plaudits for steadying the ship by cutting costs and focusing on the group’s core grocery business. He said Tesco has “stayed true to our commitment to helping customers” by working with suppliers to “keep prices low”.

Tesco engaged in a public spat with Unilever after the consumer goods giant moved to hike the prices of products such as Marmite and Hellman’s Mayonnaise by as much as 10 per cent in the wake of the pound’s collapse following the Brexit vote. The dispute was later settled.

However, analysts warned rising inflation and pressure on earnings remain a big threat.

Official figures released on Tuesday showed that the annual UK consumer prices index continued to surge last month, rising to 2.9 per cent in May from 2.7 per cent in April. Figures from the Office for National Statistics (ONS) measured inflation at 0.3 per cent in May last year, ahead of the Brexit vote.

The latest inflation figures were followed by the ONS revealing on Wednesday that average weekly earnings in Great Britain, excluding bonuses, were down 0.6 per cent in the three months to April, compared with the same period last year. It was the sharpest year on year fall since summer 2014.

John Ibbotson, analyst at Retail Vision, said Tesco had “delivered a corker in its core UK market”, stating that the performance of its food business was a “huge shot across the bows for its competitors, in particular Morrisons.”

Mr Ibbotson said: “With inflation rising sharply, Tesco has used all its immense buying power to keep prices lower for its customers. Against this inflationary backdrop, the numbers are all the more remarkable. But the combination of rising inflation and low wage growth remains a major threat. As inflation continues to erode people’s spending power, more and more of Tesco’s customers could be driven back to the discounters, Aldi and Lidl.”

Echoing those concerns, analyst Laith Khalaf at Hargreaves Lansdown warned the “rising pound will put pressure on supermarket margins”, noting that it “remains to be seen just how much those higher sales will feed through into profits”. Mr Khalaf added that Tesco faces the prospect of its pension deficit increasing, with the valuation of the scheme taking place at a time of low interest rates and rising inflation. The process of paying compensation to shareholders over the 2014 accounting scandal, and the Booker takeover, are other potential distractions. Mr Khalaf said: “The proposal to take over Booker Group still raises concerns though, particularly given the shaky backdrop, but continued momentum in the core business will help to shore up shareholder support.”

Mr Lewis said shoppers have responded to Tesco’s price pledge by “doing more of their shopping with us and as a result we continue to grow volumes, particularly in fresh food.”