Interest rates need to go up to tame inflation and could be forced even higher if the federal, state and territory governments do not slow the pace of their spending, the International Monetary Fund has warned.
Adding to the pressure on the Reserve Bank of Australia to hike interest rates possibly as early as next Tuesday, the IMF recommended further tightening of monetary policy "to ensure that inflation comes back to the [2 to 3 per cent] target range by 2025".
The recommendation, made in the organisation's latest assessment of the Australian economy, adds to speculation that the central bank will lift the official cash rate to 4.35 per cent on Melbourne Cup day following the release of data showing inflation was still growing at an annual rate of 5.4 per cent in the June quarter.
Markets have put the odds of a November 7 rate rise at around 50 per cent and many economists expect the RBA board will act to tighten monetary policy.
While headline inflation has peaked, the IMF said a combination of strong demand, growing labour costs, higher rents and electricity charges and continued supply constraints were holding up the cost of services.
"More is needed to bring inflation back to target," the organisation said.
The IMF praised the federal government's decision to bank most of its revenue windfall from high commodity prices and strong employment, saying Australia's fiscal deficit had shrunk more rapidly than in other similar countries.
But it warned of the risk that spending by governments at all levels could exacerbate inflation pressures and force interest rates even higher, forcing homebuyers to carry even more of the cost of the inflation fight.
It called on the federal, state and territory governments to "implement public investment projects at a more measured and coordinated pace ... to alleviate inflationary pressures and support the RBA's disinflation efforts".
"Otherwise, intertest rates would have to be even higher, putting the burden of adjustment disproportionately on mortgage holders," it said.
Treasurer Jim Chalmers said the IMF backed the government's handling of the budget and its targeted living cost assistance.
"The independent assessment supports the government's strategy of banking the majority of revenue upgrades when the inflation challenge is most intense," Dr Chalmers said, adding that Australian Bureau of Statistics showed that cost of living policies lowered inflation by 0.5 of a percentage point last quarter.
"The IMF concludes that fiscal policy and monetary policy are working together to address inflationary pressures," the treasurer said.
Despite the government's assistance, though, the financial pressure on families is intensifying.
Living costs for households with at least one member in the workforce jumped an average 2 per cent in the September quarter, up 0.5 of a percentage point from the previous quarter, according to the Australian Bureau of Statistics. They increased 9 per cent over 12 months.
While higher fuel prices and larger insurance premiums hit all households, ABS head of price statistics Michelle Marquardt said employee households were hit particularly hard by rising interest rates because mortgage repayments claimed a bigger share of their spending.
Ms Marquardt said that although the official cash rate had not increased since July, the expiry of many fixed-loan periods and the accumulated impact of previous rate rises had increased the financial strain for those with mortgages.
Acting Opposition treasury spokeswoman Jane Hume said the ABS data "has blown apart" Dr Chalmers' claim that working Australian were better off under the Albanese government.
Senator Hume said inflation would be "higher for longer...[which] means that interest rates are also going to be higher for longer".
"The fact that this new data comes as the IMF has flagged additional rate rises will be needed is of great concern," she said.