Australian retail sales surged 0.9% in February, blowing past market market forecasts and heightening the risk of another rise in interest rates, perhaps as early as this week.
Other government data on Monday showed approvals to build new homes in Australia jumped 10.6% in February as the volatile apartment sector boasted a huge 31.5% increase.
The unexpected strength lifted the Australian dollar to decade highs above 81.30 cents against the U.S. dollar and drove bond futures to five-year lows as the market priced in a greater risk of a rate increase from the Reserve Bank of Australia (RBA) this week.
The central bank holds its monthly policy meeting on Tuesday and interbank futures swung to show a better than 50:50 chance of an increase in the 6.25% cash rate.
The RBA will announce its decision at 9:30 a.m. on Wednesday. If rates are lifted to 6.5%, they would be at their highest since December 1996.
"Obviously stronger than expected," said Tony Meer, chief economist at Deutsche Bank. "It just adds to the string of firm numbers recently and given this data pulse, we think the RBA will hike to 6.5% come Wednesday morning."
Just last month, the central bank warned that the strength of demand could threaten inflation in the medium term.
The RBA raised rates three times last year, putting a heavy burden on Australia's highly-leveraged households. Yet strong employment growth and a jobless rate near 30-year lows of 4.6% supported incomes and gave consumers the confidence to keep shopping and borrowing.
Indeed, with sales rising more than twice as fast as forecast to A$18.8 billion (US$15.2 billion) in February, on top of a 0.8% gain in January, consumer spending looked set for a hefty rise in the first quarter as a whole.
Retail sales account for around 23% of Australia's gross domestic product and the sector is the biggest single employer with about 15% of all jobs.
"Consumption is looking pretty strong this quarter, and that's after a solid fourth quarter last year," said Adam Carr, a senior economist at UBS. "The RBA will not want to see demand re-accelerating after three hikes last year, so a step on the brakes looks likely this week, albeit the decision may be a close one," he added.
The danger of such strength was illustrated by a private-sector measure of Australian inflation which climbed a sizable 0.5% in March as petrol prices jumped.
The TD Securities-Melbourne Institute Monthly Inflation Gauge was up 3.5% on March last year, picking up from 3.4% in February and well above the RBA's 2% to 3% target range. "Inflation pressures remain acute," said Joshua Williamson, senior strategist at TD Securities.
"Indeed, the monthly inflation result leads us to think the odds now favor the RBA hiking interest rates this week as it works to reign inflation back within the target range." Based on the February inflation gauge, TD-MI forecast the official consumer price index (CPI), due out on April 24, would rise by 0.6% in the first quarter.
The CPI fell by 0.1% in the fourth quarter while underlying inflation rose by less than expected.