The S&P/ASX200 fell 23.7 points on Wednesday, down 0.27 per cent, to 8,687, while the broader All Ordinaries slipped 19.3 points lower, or 0.22 per cent, to 8,915.7.
The consumer price index came in at 4.6 per cent in the year to March, lower than expected but spiking sharply from February and at levels not seen since 2023.
"Today's inflation update for March has come in hot, but not as hot as feared," IG market analyst Tony Sycamore said.
"With both the headline and trimmed mean annual measures sitting uncomfortably above the midpoint of the Reserve Bank's two to three per cent target band, there remains a strong probability the Reserve Bank will act on its hawkish bias and deliver a 25-basis-point rate hike next week to 4.35 per cent."
This would be the RBA's third hike in 2026, completely unwinding the 75 basis points of cuts in 2025.
Energy an utilities stocks outperformed the bourse as oil prices firmed, following reports the US is preparing for an extended blockade of the Hormuz Strait, as its conflict with Iran enters a third month.
Woodside shares beat out the sector, up two per cent after its quarterly update flagged improved earnings on the back of higher liquefied natural gas prices.
Basic materials faded 0.3 per cent as mega miners BHP and Rio Tinto dipped lower.
Goldminers were a mixed bag as the precious metal eased to $US4,584 an ounce as the grim outlook for global inflation weighed on hopes of US interest rate cuts.
The heavyweight financials sector dropped 0.6 per cent, as CommBank led three of its big four competitors into the red with a 1.4 per cent slip to $172.18.
ANZ bucked the trend, eking a 0.4 per cent improvement to $36.18 after agreeing to buy out French payments joint venture partner Worldline.
ANZ reports Thursday, kicking off a huge couple of weeks for Australian banks.
"The upcoming results will be closely followed by investors as an important barometer for borrower resilience and the health of the broader economy," Sharesies head of capital markets Jacki Neumann said.
"Recent updates from Westpac and NAB have already set a cautious tone, highlighting a few key shifts - margin compression, rising impairment charges, and capital buffering."
Healthcare stocks were under pressure, dropping 1.4 per cent as blood plasma giant CSL tumbled to its lowest price since August 2017.
More than 44 per cent of the segment's value has been wiped since August.
In company news, Ooh!Media shares rocketed by almost a third after Pacific Equity Partners lobbed a non-binding takeover offer for the advertising and media company.
Early-childhood education provider G8 Education was banished to the naughty corner after plummeting more than 31 per cent on news it had suspended operations at 40 childcare centres.
Codan was the best performer of the top-200, soaring more than 15 per cent after upgrading its earnings forecast, now targeting a net profit after tax of roughly $170 million.
The Australian dollar is buying 71.58 US cents, down slightly from 71.64 US cents on Tuesday.
ON THE ASX:
* The S&P/ASX200 dropped 23.7 points, or 0.27 per cent, to 8,687
* The broader All Ordinaries lost 19.3 points, or 0.22 per cent, to 8,915.7
One Australian dollar trades for:
* 71.58 US cents, from 71.64 US cents at 5pm AEST on Tuesday
* 114.29 Japanese yen, from 114.16 Japanese yen
* 61.20 euro cents, from 61.30 euro cents
* 53.03 British pence, from 53.06 British pence
* 112.08 NZ cents, from 121.76 NZ cents
15°C