Data showed annual core inflation surged by 1.2 percent in the first quarter, beating market expectations of a 0.9 percent rise. For the year, underlying inflation rose 4.1 percent, higher than a Reuters forecast of a 3.8 percent increase and well above the RBA's target range of 2-3 percent.
"The alarming data is a timely reminder that inflation is still a big issue and the RBA will not cut rates any time soon," said John Kyriakopoulos, currency strategist at National Australia Bank. "That is supporting the Aussie dollar and we are still comfortable with the view that it could rise to 96 U.S. cents by the middle of the year."
The Aussie advanced to $0.9516 against the U.S. dollar, its highest since March 1984, from $0.9460 just before the data was released.
It has gained more than 2.5 percent in the past week, buoyed by widening interest rate differentials over the United States, rising commodity prices and a better investor appetite for
riskier assets and higher-yielding currencies.
The yield gap between the two-year U.S. and Australian government bonds widened to 436 basis points from 431 points a day earlier as the risk of a May hike by the RBA rose to around
28 percent, from less than 10 percent last week.
In contrast, the U.S. Federal Reserve is expected to cut rates later this month.
Just last week, the RBA noted that past hikes and a significant tightening of credit conditions due to the global financial market turmoil had led to a significant slowing in demand, triggering speculation that local rates had peaked.
But the broad nature of inflation pressures in the first quarter revealed in Wednesday's data led markets to pare back those expectations.
After pricing in over 40 basis points of easing in the next 12 months last week, markets are factoring in only 3 basis points of rate cuts. Australia's cash rate is at 7.25 percent, amongst the highest in the industrialized world.
"The RBA is in data watch and worry mode, hoping that the substantial tightening in financial conditions will generate a sustained slowdown while fretting about inflation and inflationary expectations from the sidelines," said Su-Lin Ong, senior economist at RBC Capital Markets. "The odds favor an extended period of elevated cash rates at 7.25 percent but that remains conditional on a further slowing in activity."
Australian bonds tumbled after the inflation data. Three-year bond futures shed 0.11 points to 93.53, while the 10-year bond contract lost 0.05 points to 93.73.