Australia's core inflation rate surged to its fastest pace in almost 17 years last quarter as the cost of eating, driving and renting all rose, sparking concerns interest rates may have to go yet higher to curb prices.
The Australian dollar jumped to a 24-year high while bonds tumbled after Wednesday's data showed annual core inflation ran at around 4.25 percent on average in the first quarter, up sharply from 3.6 percent the previous quarter.
That outstripped forecasts of 3.9 percent and took inflation further above the Reserve Bank of Australia's (RBA) 2 percent to 3 percent comfort zone.
"Underlying inflation above 4 percent is a significant way above the target, and the slowdown in demand needed to get back into target is going to have to be quite significant," said Stephen Halmarick, co-head of market economics at Citi. "That would imply the risks to monetary policy are to the upside despite some clear evidence of some slowdown in the economy."
Investors had been braced for a high result after data earlier in the week showed producer prices jumped a record 1.9 percent in the first quarter.
The central bank had also softened the market up for an inflation result around 4.0 percent, saying recent signs of a cooling in red-hot domestic demand would likely ease price pressures over time.
Consumer sentiment has slumped, leading retail sales to fall in both January and February while credit growth slowed and businesses reported a sudden downturn in activity.
As a result, analysts doubted that even this high reading on inflation would provoke a further hike in May. The RBA has already lifted rates four times since August, taking them to a 12-year high of 7.25 percent.
"The RBA will be taking comfort from the rapid slowdown in demand seen in the first quarter, and that should allow them to skip another tightening for the time being," said Brian Redican, a senior economist at Macquarie. "But if inflation doesn't slow by the third quarter, things could get nasty again," he warned. "The Reserve Bank has a real struggle on its hands."
Financial markets reacted by lifting the risk of a May hike to around 28 percent, from less than 10 percent last week.
Investors also abandoned all hope of rate cuts. Just last week the market had been pricing in over 40 basis points of easing in the next 12 months; on Wednesday that was down to 3 basis points.
Analysts were particularly dismayed by the broad nature of inflation pressures in the first quarter. The government's broadest measure of inflation, the consumer price index (CPI), rose 1.3 percent in the quarter.
The annual pace of CPI inflation accelerated sharply to 4.2 percent, from 3.0 percent in the fourth quarter, the fastest pace since 2001 when the index was biased upward by the introduction of a sales tax.
Price pressures were evident in food, housing, health, transport, education and financial services. Fuel alone rose 5.4 percent in the quarter, while the cost of drugs leaped 13.1 percent and electricity 6.0 percent.
The only tempering influence were falls in the price of clothes, furniture and consumer electronics -- mostly imported goods where the strength of the Australian dollar has helped contain costs.
When setting interest rates, the RBA focuses on two measures of underlying inflation, which strip out the biggest moves in any quarter in the hope of divining the true trend.
Yet these measures were just as alarming. The weighted median measure of inflation rose by 1.3 percent in the quarter, while the trimmed mean climbed 1.2 percent. Both easily topped market forecasts of 0.9 percent gains.
The annual rates accelerated to 4.4 percent and 4.1 percent respectively, giving an average of 4.25 percent and the highest since 1991.
"These are pretty nasty numbers," summed up Rob Henderson, chief economist markets at NAB. "It has to put more pressure on the Reserve Bank running into the May board meeting."