The soaring cost of palm oil is forcing Unilever to dilute some of its oil-based products as consumers shift from margarine to butter, which is cheaper.

The household goods giant is feeling the first signs of consumer resistance to price inflation in Europe and America, where Unilever's quarterly sales advance was made up entirely of price increases, while volumes in both regions fell.

Inflation is rampant in food and Unilever, which makes Flora margarine and Hellmann's mayonnaise, has been passing the buck. The cost of raw materials rose 5.5 per cent and the company is forecasting a 6 per cent rise in the second half of the year. Unilever is putting up prices to compensate and is determined not to lose margin.

Patrick Cescau, chief executive, said that the company spent an extra €100 million (£79 million) on advertising in the first half of 2008 but promotional expenditure is down. “These prices have to stick. The last thing we need is ‘buy one get one free' when we want consumers to get used to the new prices.”

Worst hit has been Unilever's spreads and dressings business, where volumes have been eroded by the high cost of edible oils and a shift by consumers to butter. Mr Cescau said the company was responding by focusing on “light” products that include less oils and fats. “We replace oil with something else which is lower fat and we say to the consumer: we help you with your diet and you help us with our margin.”

Pre-tax profits rose 4 per cent to €1.35 billion but Unilever's shares tumbled 8 per cent as investors reacted to the evidence that growth was evaporating.

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