Tesco is avoiding passing on the full impact of price rises to consumers, the supermarket group has said, as it reported its best UK quarterly sales growth for seven years.

Household budgets are being stretched by inflation, which hit a four-year high of 2.9% in May, but Tesco’s chief executive, Dave Lewis, said food price inflation in its stores was just 1.4%. “In tough market conditions, we have stayed true to our commitment to helping customers, working closely with our supplier partners to keep prices low,” he said.

His comments came as the retailer reported a 2.3% increase in like-for-like UK sales for the first quarter, beating analysts’ estimates of a 1.9% rise. The retailer said its first-quarter performance was boosted by a 2.7% increase in food sales as it won back shoppers from rivals.

In early morning trading the supermarket’s shares rose 3% but by mid-morning they had lost all those gains as the City digested a chequered performance of its overseas arm. International like-for-like sales slumped by 3% after it closed its “bulk selling” operation in Thailand, which primarily sold tobacco and alcohol to independent traders. “It’s not profitable and it adds complexity to the way we run the operation,” explained Lewis.

Tesco reported its first unbroken run of underlying sales growth in the UK for seven years in April, thanks to a focus on lower prices and better customer service. Analysts were worried, however, that the company’s recovery from its 2014 accounting scandal – which forced a major restructuring of the business – was losing momentum after like-for-like sales slowed to 0.7% in the fourth quarter.

Last year Tesco removed Marmite and other household brands made by Unilever from its website after the manufacturer tried to raise its prices by about 10% as a result of sterling’s slump after the Brexit vote. “The whole idea is to work in partnership with our suppliers,” Lewis said. “We recognise there is real cost inflation there and are talking through how to offset it.” Price increases, he said, were a last resort.

There is growing evidence of belt-tightening as shoppers face higher food prices. The discounters Aldi and Lidl are growing sales at their fastest rate in more than two years, while more shoppers are buying less or switching to cheaper own-label products as prices rise faster than many workers’ wages.

Inflation has been increasing steadily since the EU referendum result a year ago, which triggered a sharp drop in the value of the pound and pushed up the cost of imported goods. According to the research firm Kantar Worldpanel, inflation meant families had to spend £27 more for the same basket of goods in the 12 weeks to 21 May compared with a year ago.

Tesco also said it had no more capital gains tax to pay following the sale of its Korean business in October 2015. It had set aside £329m for this purpose but its release would have no effect on continuing operations.

“Lewis’s ruthless culling of any inefficiencies clogging up the Tesco machine, is resulting in the gradual metamorphosis from the bloated Tesco of old, to the shiny, new, leaner Tesco of today,” said Global Data analyst David Alexander. “Whether the new Tesco is a more profitable Tesco hinges on its ability to balance rising sourcing costs, with efforts to remain competitive on price.”

Lewis will face Tesco’s independent shareholders on Friday afternoon for the first time since the firm made a controversial swoop on the cash-and-carry wholesaler Booker. Some investors are worried the £3.7bn purchase of the firm behind the Londis and Budgens chains could derail its nascent financial recovery. Two of its biggest shareholders have come out against the deal, which also triggered the resignation of senior independent director Richard Cousins, who runs the catering group Compass.

Lewis’s pay package is also expected to come under scrutiny. He earned £4.15m in 2016, 10% less than the £4.63m he pocketed the previous year after Tesco failed to meet all of the targets linked to his bonus. The company’s annual report also revealed it had paid £142,000 in stamp duty and legal fees to help Lewis buy a house closer to its headquarters in Hertfordshire.

Pensions and Investment Research Consultants, a corporate governance lobby group, took a dim view of the relocation costs and has urged investors to vote against the remuneration report. It also said the ratio of chief executive to average employee pay at Tesco was an “unacceptable” 294:1.