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A higher-than-expected inflation number has dramatically raised the risk the Reserve Bank will be forced to hike interest rates again to get consumer prices under control.
The Australian Bureau of Statistics measure of consumer prices for May showed a rise in annual headline inflation from 3.6 back to 4 per cent.
The Reserve Bank targets an inflation rate of 2–3 per cent, aiming for the mid-point of that range.
Asia-Pacific economist for Indeed Callam Pickering said the data would "give the RBA a lot to think about at their next meeting", which will take place in early August.
"The latest monthly inflation figures represent a nasty upside surprise for the RBA," he noted.
"There is now a distinct possibility that both headline and underlying inflation measures will sit well above the RBA's expectations by midyear.
"With inflation already at levels that are uncomfortably high, we believe that Australian households and businesses need to prepare themselves for another rate hike."
Betashares chief economist David Bassanese agreed, and said the result "can only be described as a shocker".
"The upshot of today's result is that it places enormous pressure on the Reserve Bank to not only not cut interest rates anytime soon, but potentially lift them further," he wrote.
"It is still not a done deal that the RBA will raise rates in August.
"What will be critical is the June quarter CPI report on 31 July. If that confirms the still bubbling inflationary pressure evident in the monthly CPI reports over recent months, the RBA will have no choice but to act."
The Reserve Bank board next meets the week after that number is released, on August 5 and 6.
Deutsche Bank economist Phil O'Donaghoe expects it will decide to raise the cash rate by a quarter of a percentage point to 4.6 per cent at that meeting.
"Underlying inflation is intolerably high in Australia," he argued.
"In fact, Australia is the only G10 country where underlying inflation has increased since December."
AMP economists Shane Oliver and My Bui noted that market pricing put the risk of another rate hike "up materially" to 45 per cent.
However, they also noted many reasons for the Reserve Bank to keep rates on hold.
"The RBA needs to be cautious here as monetary policy is judged by the RBA itself to be 'restrictive' and is working to slow the economy, the lagged effect of past hikes is yet to fully show up, growth has slowed to a crawl and households are under pressure that will only be partly relieved by tax cuts from next month," they argued.
"As such the risk of overdoing the rate hikes is high adding to the risk of recession."
Rather than forecast a rate rise, they have pushed back the timing of the first rate cut to February next year, having expected earlier this year that we would have seen one by now.
While headline inflation unexpectedly jumped, the ABS measure of inflation excluding volatile price changes eased slightly from 4.1 to 4 per cent.
"We should always be careful placing too much importance on the monthly inflation figures," explained Mr Pickering.
"The headline figure isn't terribly informative but we can derive value from underlying measures, such as the monthly CPI excluding volatile items and travel.
"That measure has been stable over the past six months and that's obviously a concern for a central bank that is rapidly losing patience."
The main contributors to the price increase over the year to May were housing (+5.2 per cent), food and non-alcoholic beverages (+3.3 per cent), transport (+4.9 per cent), plus alcohol and tobacco (+6.7 per cent).
Notably, rents were up 7.4 per cent over the year to May, while fruit and vegetable prices also jumped 4.4 per cent over that period.
AMP's economics team warned that services inflation was proving to be particularly sticky.
"The worrying takeaway from the May CPI report is that some large rises that occurred in April did not slow or reverse as previously hoped," they wrote.
"Insurance rose 3 per cent just in a quarter, rents picked up pace again despite recent moderation in asking rents, and hairdressing, media services, and vehicle repairs also remained high."
However, it appears much of the May jump was due to base effects — that is, prices were up on an annual basis, not because they rose particularly strongly during May.
For example, automotive fuel prices dropped 5.1 per cent in the month of May, the first monthly fall since January, but were still up 9.3 per cent over the year to May, steeper than the 7.4 per cent annual rise recorded in April.
Likewise, despite falling 2.7 per cent in May, holiday travel and accommodation prices rose 2.9 per cent over the year to May, following a 6.2 per cent annual fall to April.