* Retail sales flat in Feb, miss forecasts of +0.4 pct m/m
* Private survey shows inflation at 7-mth low in March
* Adds to case for a rate cut by RBA, perhaps as soon as May
By Wayne Cole
SYDNEY, April 4 (Reuters) - Australian retail sales were surprisingly muted in February, a red flag for hopes that consumer spending could offset global headwinds and keep the economy accelerating through the first half.
Combined with a very subdued private-sector reading on inflation, Monday's data suggested the Reserve Bank of Australia (RBA) would have to seriously consider the need for another cut in interest rates in coming months.
The central bank holds its April policy meeting on Tuesday and is widely expected to keep the cash rate at a record low 2 percent, where it has been since last May. AU/INT
While the RBA has said there would be scope to ease if needed it has shown little inclination to act, in part because policy makers doubt even lower rates would have much impact.
Yet with the local dollar strengthening in recent weeks and inflation already near the floor of the official target range, the RBA might feel compelled to reduce rates to avert the sort of disinflationary cycle bedevilling Europe and Japan.
"Today's data suite was all about weak inflation, and will no doubt feature in tomorrow's Board discussions," said Annette Beacher, chief Asia Pacific strategist at TD Securities.
"Real activity data were underwhelming. We can easily draw the conclusion that any pickup in retail sales is via volume, not prices."
Figures from the Melbourne Institute showed annual inflation slowed to a seven-month low of 1.7 percent in March, while a key measure of underlying inflation was also under the RBA's target band of 2 to 3 percent.
Investors reacted by narrowing the odds of a future cut, with May priced at one-in-four and August at evens 0#YIB: . The Australian dollar also dipped on the soft retail news, though it remains around five U.S. cents higher over the past month.
Figures form the Australian Bureau of Statistics showed sales were unchanged in February when analysts had expected a rise of around 0.4 percent.
That was disappointing given the retail industry generates A$290 billion a year and is the second biggest employer with 1.25 million workers.
Altogether, household spending accounts for 56 percent of Australia's A$1.6 trillion ($1.18 trillion) annual economic output, and it was a pick up in this sector that helped growth accelerate to a solid 3 percent in the year to December.
A strong run in employment supported spending last year but some heat has come out of the labour market in the last few months. A survey by Australia and New Zealand Banking Group ANZ.AX showed job advertisements edged up only 0.2 percent in March, to be little changed since December.
Other figures showed approvals to build new homes did top forecasts with a rise of 3.1 percent, but activity also looks to have peaked for the time being.