SYDNEY--Reality is starting to dawn on Australian financial markets that the Reserve Bank of Australia has more work to do in terms of raising interest rates and the next increase could be just weeks away.

A sense of calm had settled on markets a month ago, with many economists appearing content that the RBA had done enough after raising the official cash rate three times in quick succession at the start of the year to combat stubborn inflation pressures and the flow-on effects of soaring fuel prices.

Even overt warnings from RBA Governor Michele Bullock after this month's policy meeting that a further interest rate increase was "quite possible" failed to ruffle any feathers.

She was soon followed by the RBA's deputy governor Andrew Hauser who said inflation remains "too high" and if the data pointed to it remaining so, then the central bank would tap the policy brakes again.

Some economists put the warnings down to mere jawboning by central bankers who recognized that inflation was in retreat, but weren't ready to restyle their narrative to something more neutral.

But their warnings appear more prescient by the day.

This week has brought news of higher-than-expected inflation in July. It was a big miss of market expectations and quickly rattled confidence at the big banks.

The Australia and New Zealand Banking Group quickly reinserted a further rate increase by end-year into its forecasts.

Thursday also brought news that consumer spending is strengthening, now for three straight months, as Australians shrugged off this year's rate hikes and ceased worrying too much about elevated fuel costs.

The data points to an increasingly buoyant economy, with aggregate demand still well above levels the RBA will feel are appropriate.

The official cash rate now stands at 4.35%, and some economists have noted that interest rates at this level weren't enough to return inflation to the 2.5% target in the previous tightening cycle.

Jessie Cameron, economist at National Australia Bank, said the stage appears set for another rate increase in September.

"Spending is now growing at its fastest annual pace since June 2023, while the three-month annualized pace suggests momentum has strengthened in recent months," Cameron said.

Josh Williamson, Citi's chief Australia economist, took it a step further, warning of a rate increase in September and another in November.

"The household spending data, coupled with yesterday's inflation, and with still no expectation of a large increase in unemployment, suggest the RBA staff have little choice but to suggest a 25 basis point hike at the next meeting," Williamson said.

But there's a problem.

A rate increase in September, combined with the threat of another in November, could turn a sharp retreat in house prices in recent months into something far more alarming.

Already some economists are expecting national house prices to fall by more than 10% over the next year.

Some are warning that twisting the screws on home buyers again could bring about one of the biggest house price falls on record.

Sydney house prices have already shed 6.7% from their January peak which is already more than half of the last big slide in 2017 to 2019, said Chris Joye, chief investment officer at Coolabah Capital, in a property market analysis at the start of the week.

Melbourne could be even worse, he added.

"These aren't yet the biggest corrections in history, but on the current trajectory, both cities losses will rank among their three worst within months," Joye added.

"It's hard to imagine how the RBA hikes into this storm," he added.