* Retail sales rise 0.8 pct in Feb, stronger than expected Data signals easing post-Brexit vote squeeze on consumers
* Growth in retail sales, smoothed out, remains weak
* But increases in cost of goods in stores now slowing
(Adds reaction) LONDON, March 22 (Reuters) - British retail sales jumped in February, further adding to the case for the Bank of England to raise interest rates in May even if March's heavy snowfall is likely to take a chunk out of growth in the first quarter of 2018. British consumers have been squeezed for the past year by a big rise in inflation. But February's data suggested a turning point was near as the cost of goods in stores rose at the slowest pace in over a year. Retail sales volumes rose 0.8 percent from January, the Office for National Statistics said on Thursday, above the consensus forecast in a Reuters poll of economists for a monthly rise of 0.4 percent. Sales in January dropped 0.2 percent. "Not a sparkling result for Britain's retailers in February, but a marked improvement from the start of the year," said Ian Gilmartin, a banker at Barclays who focuses on the retail sector. Sterling rose slightly against the U.S. dollar immediately after the figures to touch a fresh seven-week high. Still, looking at the three months to February, which smoothes out monthly volatility in the data, sales fell 0.4 percent - the weakest growth in nearly a year - after a big drop in sales in December. There is a risk of a further downturn in March, when snow storms brought widespread disruption across Britain. Britain's economy underperformed its rivals last year as higher inflation - caused by the fall in the pound since the Brexit vote in June 2016 - hurt consumers' spending power. The Bank of England, which is due to announce its March policy decision at 1200 GMT, expects the consumer squeeze to ease in 2018 as inflation cools and wage growth ticks higher. Capital Economics said Thursday's figures suggested retail was likely to drag on economic growth over the first three months of 2018 but other measures of spending were turning a corner. The data showed retail prices rose in February by 2.5 percent year-on-year, the smallest increase since January 2017. Most economists polled by Reuters think the BoE will raise interest rates in May for only the second time since the financial crisis, spurred partly by a recovery in pay growth. Official data published on Wednesday showed overall wages rose at the fastest annual pace since mid-2015 during the three months to January. The ONS said retail sales growth in February was driven mostly by supermarkets, as well as vehicle fuel and online shopping. Non-food retailers, which include department stores and clothes shops, suffered a fall in sales. Some major non-food retailers have sought protection from creditors over the past couple of months, such as Toys R Us UK and electricals chain Maplin. Compared with a year earlier, the ONS said February retail sales were up 1.5 percent versus expectations of a 1.3 percent rise, the ONS said. Last month the BoE forecast real-terms household spending growth would slow to 1.25 percent in 2018 from 1.5 percent in 2017 as demand shifted towards business investment and exports.
(Editing by Alison Williams)