Consumer prices in Australia rose at their fastest pace in more than two decades last quarter and are likely to accelerate even further, as food and energy costs explode.

The gloomy report on Wednesday showing inflation jumped 1.8% in the June quarter stoked speculation interest rates will need to more than double to bring the outbreak under control.

The annual rate picked up to 6.1%, from 5.1% in the year through March, the highest since 2001 and more than twice the pace of wage growth, data from the Australian Bureau of Statistics showed. Inflation only rose by 3.5% during the last calendar year.

Treasurer Jim Chalmers warned that inflation would rise further.

"We are not surprised to see inflation north of 6%, but it’s still confronting," Chalmers said. "Inflation is high and rising. It will get tougher before it starts to ease."

The report comes just a day before Chalmers is due to update the previous government’s budget forecasts.

"Inflation revised up substantially, growth revised down, and all of the implications that brings," he told reporters on the update.

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

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

Economist Angela Jackson, from the consultancy Impact Economics and Policy, predicted the RBA will lift the cash rate by half a percentage point.

The bank made rises of that size in its July and June meetings. The rate rose by a quarter of a percentage point in May, the first rate hike in more than 11 years.

"In terms of the headline figure at 6.1, it is still very high ... and it means interest rates will probably go up again next month," Jackson told Australian Broadcasting Corp.

Markets are leaning against an RBA move of 75 basis points, though the U.S. Federal Reserve (Fed) is expected to hike by a similar amount later on Wednesday.

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

That 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 rates will likely keep rising toward a "neutral" level of at least 2.5%, while markets have priced in as much as 3.75%.

"The challenge now is calibrating the amount of tightening that will be needed," said Paul Bloxham, head of Australian economics at HSBC, noting "neutral" was a moving target and tough to hit in practice.

"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 consumer price index (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.

While petrol has eased in recent weeks, market disruptions are boosting the cost of electricity and gas, while widespread flooding has lifted prices for fresh food.

As a result, analysts fear CPI inflation could well top 7%, or even 8%, by the end of the year and risk becoming embedded in wage and price expectations.

Alarmingly, an ANZ survey out this week showed consumers now expected inflation to run at 6% over the next two years.

Market measures of future inflation are more contained, with bond yields clearly signaling an economic slowdown ahead but, as yet, no recession.