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Gasoline and groceries are fuelling a flare-up in inflation.


At the BP station near the headquarters of Ford Motor Co., the price of a gallon of gasoline has topped $4 (U.S.), a level that in the past has caused panic among U.S. drivers and the companies that sell them cars.

There's no panic yet, as there was in 2008 when prices soared above the $4 mark just as the United States fell into a severe recession. But first-quarter financial results from Ford and two big U.S. airlines underline how rising fuel costs are starting to ripple through key segments of the world's largest economy.

They have already dampened consumer confidence and are likely to slow economic growth this year and in 2012. And gas costs, which have gone up a remarkable 35 days in a row in the United States, are now starting to become a major concern even for companies that have been prospering in spite of them.

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The cost of oil could lop as much as half a percentage point off U.S. economic growth, Ford chief executive officer Alan Mulally said Tuesday, even as the No. 2 U.S. auto maker reported its best first-quarter performance since 1998.

Most North Americans can't totally insulate themselves from the soaring pump prices because they must drive to get to and from work. Rising costs of gasoline and food could suck as much $80-billion out of the pockets of U.S. consumers this year, said Paul Dales, senior U.S. economist for Capital Economics in Toronto.

As a result, they have no choice but to cut back on other spending to adjust for the increased expenses, or to reduce non-essential driving and change their eating habits, Mr. Dales said. "Not necessarily eating less, but maybe switching to cheaper types of food. Instead of buying some juicy steaks, maybe buying a couple of burgers instead."

Many Americans may take shorter holidays this summer, or no holidays at all. That would represent another blow to Delta Airlines Inc. and US Airways Group Inc., both of which said Tuesday that higher prices for jet fuel helped batter their first-quarter results.

"Delta's fuel price for the quarter increased 30 per cent year-on-year and, based on current market trends, we now expect our fuel expense for the year will increase by $3-billion," Delta chief executive officer Richard Anderson told investors and analysts.

"High fuel prices are the new norm for the industry," Mr. Anderson said, adding that Delta must "fully recapture our costs on every flight every day."

Fuel costs amounted to $1-billion for US Air in the first quarter, or about one-third of total costs.

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Delta, US Air and other airlines have been raising fares almost weekly to offset the increase in the price of jet fuel. Delta expects it to hit $3.26 a gallon this quarter, compared with $2.89 in the three months ended March 31.

Revenue growth made up for about 70 per cent of the cost increases in the first quarter, Mr. Anderson said. But the key for the airlines is not to push travellers to the point where they will reject higher fares.

"At some point, you'll get consumer push back for ticket price increases," said Ray Neidl, who follows the airline industry for New York-based Maxim Group LLC.

For Ford, the good news beyond the first-quarter profit is that for perhaps the first time in its history, it is in a strong position to benefit from high gas prices. It has new and credible offerings in the compact and subcompact segments of the car market.

"Higher fuel prices … have contributed to market shift in industry segmentation toward smaller cars," Mr. Mulally said on a conference call.

Smaller vehicles have traditionally been a profit wasteland for the auto makers, but the Detroit auto makers have changed that equation by slashing billions of dollars of costs – helped in the case of Chrysler Group LLC and General Motors Co. by government bailouts and a trip through the U.S. bankruptcy courts.

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In addition, Mr. Mulally noted, drivers now want the same creature comforts on smaller cars that they enjoyed on bigger vehicles. He pointed to the subcompact Fiesta, where one of the most popular options is heated leather seats.

"This is on a Fiesta," he said.

With files from Reuters and AP

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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