People sit and watch the sunset over the Central Business District (CBD) skyline in Sydney, Australia, July 10, 2025. REUTERS/Hollie Adams

By Stella Qiu

SYDNEY, Dec 4 (Reuters) - Australian households went on the biggest spending binge in almost two years in October in just the latest example of economic froth that could mean the next move in interest rates is up rather than down.

The surprise strength in the spending data lifted three-year government bond yields by 3 basis points to 4.035%, the highest since January. Markets were quick to bring forward the bets for rate hikes from the Reserve Bank of Australia, with a move in May next year about 50% priced in.

Data from the Australian Bureau of Statistics on Thursday showed its monthly household spending indicator jumped 1.3% in October to A$78.4 billion ($51.77 billion) as year-end sales events lured consumers. That followed a rise of 0.3% the previous month.

The annual pace of spending growth picked up to 5.6% from 5.1%.

"I think at this stage we just keep getting more and more information that leans that way (towards a hike)," said Jonathan Kearns, chief economist at Challenger.

"You get more information that there does seem to be a pick-up in domestic demand and today's household consumption is consistent with that. The evidence is certainly increasing that the reserve bank may need to hike next year but you know May is still a long time way."

Thursday's data showed spending on goods climbed a solid 1.7% while spending on services rose 0.8%, with the ABS attributing to promotional events that saw households spend more on clothing, footwear, furnishings and electronics.

"Services spending also rose in October, as major concerts and cultural festivals drove up demand for catering, hospitality and hotel stays in major cities," said Tom Lay, ABS head of business statistics.

The RBA has cut interest rates three times this year to 3.6%. It is considered certain to hold steady next Tuesday and perhaps turn more hawkish on the policy outlook after inflation surged in the third quarter.

Stronger consumer spending is making the RBA's job harder given the economy could be already operating at the potential growth limit. Adding to the challenge, the consumer mood turned optimistic last month for the first time in almost four years.

Just a day earlier, data showed the economy expanded at the fastest annual pace in two years in the September quarter, fueled by business, government and consumer spending.

That helped explain why inflation has been hotter than expected over recent months. Headline inflation accelerated for a fourth straight month to 3.8% in October, while the trimmed mean measure of core inflation also rose to 3.3%, above the RBA's target of 2-3%.

($1 = 1.5145 Australian dollars)

(Reporting by Stella Qiu and Wayne Cole; Editing by Sam Holmes and Stephen Coates)