Stronger-than-expected jobs and spending data has bolstered the case for more rate hikes, but events overseas could stay the Reserve Bank's hand.
An extra 40,300 jobs were added to the economy in May, driving down the unemployment rate to 4.4 per cent, the Australian Bureau of Statistics reported on Thursday.
The jobless rate fall was in line with economist expectations.
But the jump in employment exceeded consensus forecasts for 25,000 new jobs to be added to the economy.
Combined with a stronger-than-expected rise in underlying inflation on Wednesday, it added to the case for another rate rise, VanEck head of investments and capital markets Russel Chesler said.
Household spending rose 1.3 per cent in May, after a fall of 1.1 per cent in April.
"This is not the clean slowing signal markets were hoping for," Mr Chesler said.
"The next inflation print will be critical. If employment remains resilient and consumers continue spending despite weaker growth and lower savings, the RBA may have little choice but to tighten again."
But a rate cut is not locked in by any means.
HSBC chief economist Paul Bloxham said the figures were not as strong as the headline readings suggested.
The labour force survey is notoriously volatile and the drop in the unemployment rate comes after it jumped 0.2 percentage points to 4.5 per cent in the month prior.
The unwind was driven by a reduction in the backlog of people waiting to start a job, ABS head of labour statistics Sean Crick said.
While the result suggests the labour market is still relatively resilient, it doesn't necessarily show it is tightening further.
Despite the strong rise in jobs created, the ABS revised up the number of jobs lost in April from 19,000 to 41,000. That means that in net terms, no jobs were created over the two months.
There was also a caveat to the household spending figures, given the rise was largely driven by a normalisation in transport spending after the outbreak of the Middle East conflict caused a spike in airfare refunds in April.
Excluding this, spending would have only risen 0.6 per cent in the month.
Like the inflation figures, the jobs and spending data was quite backward-looking and developments since then suggested the economy had further to slow, Mr Bloxham said.
"This includes the RBA's May rate hike, the federal budget, clear signs of a weakening housing market and the recent sharp fall in oil prices," he said.
Oil prices continued to fall as expectations ramped up of a permanent deal between the US and Iran to reopen the Strait of Hormuz.
The Brent crude benchmark price fell below $US74 a barrel, much lower than the RBA's forecast of more than $US100 a barrel for the June quarter.
The central bank would have to take into account the lower oil price potentially taking some pressure off inflation, but prices were unlikely to head back to pre-war levels of $US60 a barrel soon, NAB head of Australian economics Gareth Spence said.
Prices of plastics, food packaging and fertiliser remained elevated, so the RBA would still be concerned about high input costs being passed through to things like groceries, Mr Spence said.
Consumer price figures released on Wednesday showed the trimmed mean, which measures underlying inflation, rose 3.6 per cent in the 12 months to May, even as a sharp fall in fuel prices caused headline inflation to drop to four per cent.
