Consumer price inflation in Australia decelerated less than forecast in Q1 as service cost pressures remained high.

The Aussie Dollar subsequently rose 0.6% to $0.6522, whilst three-year bond futures fell 15 ticks to 96.00, the lowest so far this year.

Furthermore, spooked markets priced in a slight chance, around 4%, of a rate rise by August, yet pricing out any bet of a rate cut this year.

Total easing forecast for 2024 has fallen to 3 basis points, down from a prior 17 basis points, Reuters reports.

The consumer price index (CPI) increased 1% in Q1, surpassing market forecasts of 0.8%, according to data from the Australian Bureau of Statistics published on Wednesday.

Yet, the annual pace of CPI inflation decelerated to 3.6% annually from 4.1%, mainly due to base effects. However, it still exceeded forecasts for a decrease to 3.5%. In March alone, the CPI rose by 3.5% compared to the same month the previous year, slightly up from February's 3.4%.

Furthermore, the trimmed mean, a closely monitored measure of core inflation, increased 1% in Q1, exceeding forecasts of 0.8%. The annual pace slowed down to 4% from 4.2%. 

"It's higher than we were expecting, higher than what the market was expecting and higher than what the RBA (Reserve Bank of Australia) would be expecting, so that 1% number will be something that they'll be alarmed about," stated Madeline Dunk, an ANZ economist.

"I think the RBA will want to be seeing those services and non-tradables numbers decelerate in Q2 and if we don't see that there is a chance we see those rate cuts get pushed out to next year."

On Wednesday, Westpac revised its anticipated timing for the first rate cut to November, pushing it back from September. This adjustment was made due to the slower progress in disinflation and the continued strength of the labour market.

The Reserve Bank of Australia has maintained interest rates at 4.35% for three consecutive meetings, as there was growing confidence that inflation would gradually return to its target range of 2-3% by late 2025.

"The hot first-quarter CPI report will test the RBA's patience — we expect to hear warnings of a rate hike but don't think it will ultimately deliver...What the inflation data do mean for rates, though, is that cuts are off the table in the very near term," said economist at Bloomberg Economics, James McIntyre.