Prices in British shops rose at the slowest pace in more than two years in March, the British Retail Consortium (BRC) said on Tuesday, adding to signs that the country's inflation squeeze is now fading fast.

Shop price inflation dropped to 1.3% from 2.5% in February, the smallest annual increase since December 2021, the BRC said.

Food prices rose by 3.7%, down from 5.0%, while non-food prices rose by just 0.2%, slowing from a 1.3% increase in February.

The Bank of England expects Britain's headline rate of inflation to dip below 2% in the April-to-June period, helped in large part by further falls in energy costs.

Investors at the end of last week were putting a roughly 50% chance on the BoE cutting interest rates in June for the first time since the onset of the COVID-19 pandemic. A cut in August was fully priced into interest rate future markets.

BRC Chief Executive Helen Dickinson said the slowing of inflation was linked to competition among retailers, falling dairy prices and bargain offers on popular chocolate brands even as the price of some Easter treats rose in annual terms.

"While these figures are good news for consumers, from this month, retailers face significant increased cost pressures that could put progress on bringing down inflation at risk," Dickinson said.

She listed rising business taxes, expensive recycling proposals, new post-Brexit border checks and a nearly 10% increase in Britain's minimum wage from this month as extra costs for shops.

The BRC data was based on prices collected between March 1 and March 7.

(Reporting by William Schomberg; Editing by Suban Abdulla)