However, much of the increase was concentrated in a 1.7 percent jump in food sales, the biggest in almost three years. If food was excluded, sales fell 0.3 percent in the month.
"It's not as strong as the headline makes out," said Joshua Williamson, a senior strategist at TD Securities. "Food was up primarily due to inflation so volumes were down pretty much. Consumers haven't had a second wind."
That assessment was borne out by figures on sales adjusted for inflation in the entire first quarter which showed a fall of 0.1 percent, a big turnaround from the fourth quarter's 1.3 percent increase.
That augured ill for growth in the economy as a whole. Retail sales make up nearly 40 percent of consumption which in turn accounts for 60 percent of gross domestic product (GDP).
"Overall it is still a weak quarter," said Su-Lin Ong, a senior economist at RBC Capital Markets. "We're only seeing a combination of higher prices and lower volumes. I don't think it changes the big picture, with the overall quarter quite soft."
Investors, however, had been betting on an even weaker report and had to cut short positions in the Australian dollar, lifting it around a quarter of a U.S. cent after the data.
Bonds and bill futures eased, but more because the numbers seemed to push back the chances of future rate cuts rather than adding to the risk of yet another hike. The Reserve Bank of Australia (RBA) holds its May policy meeting next week but most analysts expect it to hold steady at 7.25 percent.
The central bank has raised rates four times since August as it sought to cool the red-hot economy and restrain inflation.
So far it has little effect on core inflation, which accelerated to a 17-year peak of 4.2 percent in the first quarter, above the central bank's 2 to 3 percent target band.
But the hikes, coupled with further rises in mortgage rates from commercial banks, have clearly had an impact on demand.
Credit growth, home sales and applications to build new homes have all turned lower. A closely watched measure of consumer confidence fell in each of the past four months to hit a 15 year-low in April.
The survey's measure of whether it was a good time to buy a major household item had fallen off a cliff, being 45 percent lower in April than in the same month of 2007.
The impact was illustrated by a profit warning from furniture chain Nick Scali last week after sales slowed sharply. Its shares have since sunk 38 percent.
Yet, not all is gloom. The labor market remains strong with unemployment down at 33-year lows and businesses still complaining that they cannot find enough workers.
Incomes are rising and should be boosted by tax cuts in July. The country's huge mining industry is also in for a profit bonanza from surging coal and iron ore prices, which alone could add A$45 billion to Australia's export earnings.
Data out this week showed the RBA's index of commodity prices jumped 10 percent in April alone, and a further increase of around 20 percent is expected in the next few months.
"We're going to get a lot of income flowing into the economy in the second half of this year, and while we may be seeing a little bit of softness now, you have to wonder how long that will last," said Michael Blythe, chief economist at Commonwealth Bank. "The chance of a rate hike is still out there."