Finsbury Foods has said continued investment will help it address commodity cost inflation, but has warned it may also have to raise prices.

The business – which makes licensed and own-label cakes and breads – made the comments as it announced retail food market deflation had contributed to a 2.9% slump in sales through its UK bakery division in the six months to 31 December 2016.

Sales through the company’s European business grew 31.7%, however, resulting in a flat overall performance and sales of £156.6m for the total group.

Finsbury’s business outside the UK comprises its 50%-owned Lightbody Stretz, which supplies and distributes the group’s UK manufactured products and third-party products, primarily to Europe.

The company said it continued to benefit from strong cashflow and had invested a record £5m in capital projects in the past six months to “build on its successful product innovation and importantly continue to improve efficiency and productivity throughout the group”.

“The board has identified continued investment as a fundamental part of the group’s long-term competitiveness strategy and it will play an important role in helping address the current challenges of sterling-induced commodity inflation and planned national living wage increases.”

It added, however, that the scale of current cost inflation meant further cost recovery would be required “and will become inflationary in the second half and beyond”.

Last year, the company said it had responded to cost increases by modifying promotional activity and reviewing opportunities for reformulation changes to minimise passed-on costs.

The comment follows a raft of businesses raising prices in the wake of commodity cost increases driven by the weakness of sterling. These include Premier Foods, which this month announced it planned ‘mid single-digit’ increases in the prices it charged customers.

In today’s trading update, Finsbury added that trading had continued to be “solid” throughout the Christmas period and that its performance was in line with management expectations.

It said its overseas growth was “continuing to demonstrate the strengths of our strategic diversification”.

“The board has built the group into a diverse multi-channel speciality bakery group,” it stated.

“Following the exceptional growth and diversification over the prior years, the business is well placed to maintain its position, despite the market conditions.”