Tesco recovery gains pace with fastest sales growth in 3 years

* Tesco (Frankfurt: 852647 - news) sales up 2.2 pct in 12 weeks to Nov. 6 - Kantar

* Tesco consolidates return to market share growth

* Discounters growing at slowest rate since 2011

* Inflation could return in coming months

* Tesco shares rise up to 4 pct, up 43 pct this year

(Adds detail, analyst comment, Kantar table, updates shares)

By James Davey

LONDON, Nov 15 (Reuters) - Tesco's sales are rising

at the fastest pace for three years, industry data showed on

Tuesday, signalling the recovery at Britain's biggest

supermarket group is gathering pace.

Shares (Berlin: DI6.BE - news) in the company climbed as much as 4 percent after

market researcher Kantar Worldpanel said Tesco's sales grew by

2.2 percent year-on-year in the 12 weeks to Nov. 6, boosting its

share of Britain's grocery market to 28.2 percent from 27.9

percent this time last year.

The stock has risen 43 percent so far this year, with the

firm reporting three straight quarters of underlying sales

growth in its main British market. Last month's Kantar report

also showed Tesco growing its UK market share for the first time

in five years.

In October, Tesco set tougher profitability targets too.

"Tesco's continued sales acceleration and it winning market

share is the key feature this month, despite it having a

declining share of retail space," said HSBC analyst David

McCarthy, who on Monday upgraded his stance on Tesco to "buy".

Kantar highlighted that most of Tesco's gains came from its

own-label products, both its cheaper "Farm Brands", launched in

March to encourage shoppers to return from discounters Aldi

and Lidl, and its more upmarket "Finest"

range. It also noted more affluent shoppers returning to Tesco.

While Tesco's momentum continues to build, Aldi and Lidl saw

their sales growth fall to the slowest rate since 2011, up 10.2

percent and up 6.1 percent respectively, Kantar said.

But Kantar noted the discounters are still attracting new

shoppers, helped by continuing store openings.

Britain's other major supermarkets - Sainsbury (Amsterdam: SJ6.AS - news) 's,

Asda and Morrisons - saw sales declines of 0.7

percent, 5.0 percent and 2.4 percent respectively, though

Morrisons' fall reflected the closure of some stores.

Overall, UK grocery sales increased 0.8 percent in the

12-week period.

DEFLATION CONTRACTS

Kantar also said deflation in Britain's supermarket sector

weakened to 0.5 percent in the 12 weeks to Nov. 6 and predicted

that after more than two years of deflation prices could start

to rise in the coming months.

"We're likely to see prices starting to creep up again in

December, unless retailers choose Christmas to unleash a new

round of price cuts," said Fraser McKevitt, head of retail and

consumer insight at Kantar Worldpanel.

"Although it's tempting to link any potential price

increases to Brexit and the devaluation of sterling, it's worth

remembering that deflation has been easing since December last

year, well before the (June) referendum."

Official data published on Tuesday showed UK consumer prices

rose 0.9 percent in October compared with a year ago.

Market share and sales (percent)

12 wks to 12 wks to pct change

Nov. 6 2016 Nov 8 2015 in sales

Tesco 28.2 27.9 2.2

Sainsbury's 16.3 16.6 -0.7

Asda 15.5 16.4 -5.0

Morrisons 10.5 10.8 -2.4

Co-operative 6.4 6.3 2.2

Aldi 6.1 5.6 10.2

Waitrose 5.3 5.2 3.0

Lidl 4.6 4.4 6.1

Iceland 2.1 1.9 8.3

(Editing by Kate Holton and Mark Potter)