Rising inflation and a pick-up in non-mining activity shows a rate hike could be on the cards in early 2015.
The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.3 per cent in May and by 2.9 per cent in the year to May.
The result was driven by price rises for fruit and vegetables, furniture and tobacco, which were offset by falls in holiday travel and accommodation, health, footwear and petrol.
TD Securities head of Asia-Pacific research Annette Beacher said the gauge showed inflation would be at the top of the Reserve Bank of Australia's two to three per cent target band in the June quarter.
Rising inflation, as well as stronger business investment intentions in March quarter capital expenditure data, showed a rate hike was on the horizon, she said.
Last week's capital expenditure data from the Australian Bureau of Statistics showed Australian businesses outside the mining sector had increased their investment intentions by 12 per cent for 2014/15 from three months ago.
"The clear signal from our gauge is that inflation remains sticky and the `soft' prior March quarter consumer price index report could prove to be a one-off," Ms Beacher said.
"We believe the recent substantial upgrade to 2014/15 services investment plans should be well received, and combined with the leap in residential construction in the early months of 2014 proves that non-mining activity can offset the decline in mining investment.
"The market remains too complacent by not pricing any rate rises over the next twelve months."
TD Securities is forecasting a hike in March 2015.
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