Bakery group Greggs said on Tuesday (28 February) that its profits and sales increased last year, but warned the prospect of increasing inflation in Britain could squeeze its margins.

In the 12 months to 31 December, the FTSE 250-listed group recorded a 4.2% year-on-year increase in sales, a slight slowdown from the 4.7% gain recorded in the previous year, while profits climbed £2.1m ($2.6m) to £75.1m. Meanwhile, total sales rose 7% to £894.2m and the company lifted its final dividend from 28.6p to 31p.

Over the last two years, Greggs has launched a series of lighter food options, diversifying its business from the traditional pasties and sausage rolls in a bid to appeal customers looking for healthier food.

The decision has been met with approval by consumers, as the 'balanced choice' range now makes up for 10% the company's sales.

However, the bakery chain warned its margins could be squeezed due to the ongoing economic uncertainty in Britain, which could be exacerbated by increasing inflation.

The rate of inflation rose 1.8% year-on-year in January, up from the 1.6% reading recorded in December, and higher than the 1.9% figure analysts forecast. Economists expect household budgets will be squeezed even further, as inflation is set to hit 3% next year.

"The UK consumer outlook is more challenging than we have seen in recent years, with industry-wide pressures emerging in commodities as well as labour costs," said group chief executive Roger Whiteside.

"However we are confident of making further progress as we implement our plan to grow Greggs as a contemporary food-on-the-go brand."

Greggs, which has launched a five-year programme that will see it invest £100m on manufacturing and distribution operations, added 2017 has started in line with expectations and like-for-like sales in the eight weeks to 25 February were up 2.0% year-on-year.