Sainsbury's says UK fresh food prices falling, packaged goods to follow

Q1 like-for-like sales up 9.8%

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Says has returned to volume growth

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Keeps profit guidance for full year

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Shares down 1.5%

LONDON, July 4 (Reuters) - Sainsbury's, Britain's second-largest supermarket group, said on Tuesday fresh food prices were falling and packaged goods would follow, good news for UK inflation, as it powered to a 9.8% rise in quarterly underlying sales.

Trading conditions in the 16 weeks to June 24 were dominated by high inflation, which has become a major political issue in Britain as it outstrips pay growth at a time of rising interest rates, putting household budgets under strain.

Signs that it is easing and even reversing are being closely watched by the government, the Bank of England and consumers.

The boss of Sainsbury's said inflation would continue to moderate this year as input costs come down but cautioned that high labour costs mean prices won't return to previous levels.

"We've seen in those products where the prices went up first, and that was predominantly in fresh food, we've seen prices start to come down," CEO Simon Roberts told reporters on Tuesday, highlighting milk prices.

"The packaged products just takes longer to feed through the system and so those products will be a bit more stubborn."

Food and drink inflation was 18.3% in May according to the most recent official data, and 14.6% in June according to the most recent industry data.

The supermarkets have been accused by trade unions and some politicians of profiteering by being too slow in passing on falls in global commodity prices to consumers - a charge they reject.

COMPETITIVE POSITION

Sainsbury's is having to balance the increased cost of products from suppliers with trying to prevent shoppers switching to discounters Aldi and Lidl. It said prices on its top 100 selling products were now lower than they were in March in a market where average prices were higher.

The group, which has a 15% share of Britain's grocery market, maintained forecasts for a 2023-24 underlying pretax profit of 640-700 million pounds ($812-$888 million) compared with 690 million pounds in 2022-23.

It said it saw a return to volume growth in the period, its first quarter, posting an 11% jump in grocery sales and general merchandise sales up 4%.

Shares in the company, up 24% in the year to date, traded down 1.5% in early deals. RBC Brewin Dolphin analysts called the group's update "resilient".

Last month, market leader Tesco, reported a 9% rise in first-quarter underlying UK sales and said food inflation had peaked.

($1 = 0.7883 pounds) (Reporting by James Davey and Sarah Young; editing by Paul Sandle, Jason Neely and Louise Heavens)