Reserve Bank of Australia board faces tough July rates decision

That is a worry because on both counts things have not improved since. In fact, the risks have deepened.

Property market analyst CoreLogic figures show house prices grew 1.1 per cent last month and have now climbed 3.4 per cent in four months. The value of home loans, meanwhile, jumped 4.8 per cent in May to reach their highest level since last October.

Both developments will concern the central bank, albeit for different reasons. Rising house values increase homeowner wealth and make people more likely to spend, while the growing willingness of people to borrow tells the RBA that financial conditions are not as tight as it thought.

Take this together with data showing job vacancies and demand for workers remains strong, and the case for a July 4 rate rise appears increasingly compelling.

But what about evidence that inflation is coming down?

The monthly consumer price index confirmed headline inflation is falling. In May it slowed to 5.6 per cent, its lowest reading in more than a year.

The result provides a measure of reassurance that international developments to bring down price pressures like reduced shipping costs and the normalisation of supply chains are resonating locally.

But underlying inflation, which excludes volatile items like fuel and holiday travel, was still high in May, growing at an annual rate of 6.4 per cent.

This feeds RBA concerns that inflation, particularly in the cost of services, will prove to be persistent.

And the central bank frets that the longer prices stay elevated, the greater the chance for big pay claims - especially when unemployment is so low.

Reserve Bank deputy governor Michele Bullock, who is touted as a possible successor to incumbent Philip Lowe if his current term is not extended by the government, last week confirmed that the RBA is willing to let inflation fall gradually over the next two years in order to hold on to as many of the employment gains made during the pandemic era as possible.

But the central bank's patience is not endless.

Its overriding priority is to bring inflation down and if it is not convinced it is retreating fast enough it is likely to act.

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Investors think there are good odds of two more rate hikes by the end of the year. Many economists think the first of these will come on Tuesday or, if not then, August 1.

The risk for the Reserve Bank - and the nation - is that in pushing to tame inflation it drives the country into recession.

The RBA accepts high interest rates are already working to slow the economy and consumption is now "quite weak". It is just not sure it is weak enough.

Mixed signals like increased borrowing to buy homes and cars and May's splurge on eating out, do not help.

Veteran observers like AMP economist Shane Oliver warn that, if rates keep rising, we could soon hear the sound of the economy breaking.