SYDNEY (REUTERS) – Australian inflation sped to a 21-year high last quarter and is likely to accelerate even further as food and energy costs explode, stoking speculation that interest rates will need to more than double to bring the outbreak under control.

The gloomy report on Wednesday (July 27) comes just a day before Treasurer Jim Chalmers is due to update the previous government’s budget forecasts, and he is already warning that inflation would get worse before it got better.

“It will be confronting,” Mr Chalmers told reporters on the update. “Inflation revised up substantially, growth revised down, and all of the implications that brings.”

Data from the Australian Bureau of Statistics showed that the consumer price index (CPI) jumped 1.8 per cent in the June quarter, just short of market forecasts of 1.9 per cent.

The annual rate picked up to 6.1 per cent from 5.1 per cent, the highest since 2001 and more than twice the pace of wage growth.

A closely watched measure of core inflation, the trimmed mean, rose 1.5 per cent in the quarter, lifting the annual pace to the highest since the series began in 2003 at 4.9 per cent.

This took core inflation further away from the Reserve Bank of Australia’s (RBA) 2 per cent to 3 per cent target band and cemented expectations it would hike the 1.35 per cent cash rate by 50 basis points at a policy meeting on Aug 2.

The RBA, like many central banks, was wrong-footed by the rapid pickup in inflation and has already had to raise rates three times, the most aggressive tightening in decades.

Narrow path

This is one reason Australia’s recently elected Labor government has launched an independent review of the RBA to see if its policies and governance needed updating.

RBA governor Philip Lowe has indicated that rates will likely keep rising towards a “neutral” level of at least 2.5 per cent, while markets have priced in as much as 3.75 per cent.

“The challenge now is calibrating the amount of tightening that will be needed,” said Mr Paul Bloxham, head of Australian economics at HSBC.

“Going too hard from here may deliver a recession – too little, a persistent inflation problem,” he warned. “A narrow pathway, indeed.”

The challenge is all the greater as much of the inflation pulse is global and beyond the RBA’s control. The CPI measure of petrol prices hit a record peak for the fourth straight quarter, while supply chain problems and rising shipping costs saw goods inflation reach the highest since 1987.