Retail sales and inflation took a step backward in March, as dour consumer demand hurt the former and suppressed energy prices stalled the latter.

Total retail sales for March clocked in at $344.4 billion, a decrease of 1.1% from February and a 9.4% dive from March 2008. Overall, first quarter retail sales sank 8.8% compared to the same period a year ago, the U.S. Commerce Department said in a report.

The stats reverse the back-to-back monthly gains that kicked off 2009. Those gains surprised the market not only because they followed dismal holiday shopping numbers in November and December, but also because unemployment continued to get worse.

“The surprisingly sharp drop in retail spending shows how uncertain consumers are about the recovery,” Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients. “Consumer spending had been growing much more strongly in the first quarter than any of us could have expected, so a one-month cutback should not have been a surprise.”

Among the hardest hit sectors, gasoline station sales were down 34.1% from March 2008, and motor vehicle and parts dealers’ sales were down 23.5% from last year. Food and beverage stores held strong with only a 0.1% decline. Healthcare spending posted the best figures with a 2.2% annual gain.

“This was not a pretty report as demand for just about everything fell,” Naroff said. “There were large reductions in demand for furniture, electronics and appliances, building materials, sporting goods and clothing.”

Sinking demand for energy products played a large hand in keeping producer prices in check. The U.S. Department of Labor said that the Producer Price Index (PPI) for finished goods, a measure of inflation, fell 1.2% in March after inching forward 0.1% in February.

Prices for energy products fell 5.5% after rising 1.3% in February. Food prices fell 0.7% after falling 1.6% the month prior. Excluding food and energy, the PPI was a flat for the month.

While not a positive, flat inflation isn’t much of a threat when compared to the host of other economic issues the Obama Administration is addressing. In fact, the U.S. Federal Reserve said it expected inflation to be “subdued” in a March 18 statement.

But inflationary concerns will be on the horizon, when government measures to reboot the economy kick in – flooding the market with liquidity that can’t be absorbed by record low interest rates.

Source: Retail Sales and Inflation Slip in March