SYDNEY (Reuters) -Australian inflation was surprisingly strong in the third quarter, highlighting stubborn cost pressures that added greatly to the risk of a rise in interest rates as early as next month.

Investors reacted by narrowing the odds on the Reserve Bank of Australia (RBA) resuming rate hikes next month after four months of pauses, with futures now pricing in a 60% chance of a quarter-point hike to 4.35%, compared with 35% before the data.

Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 1.2% in the third quarter, above market forecasts of 1.1% and up from a 0.8% increase the previous quarter.

The annual pace of inflation slowed to 5.4%, from 6.0%, but was again above forecasts of 5.3%. For September alone, the CPI rose 5.6% compared to the same month a year earlier, up from 5.2% in August.

A closely watched measure of core inflation, the trimmed mean, rose 1.2% in the third quarter, to top forecasts of 1.1%. The annual pace slowed to 5.2%, from 5.9%.

The Australian dollar rose 0.5% to a week high of $0.6390 and three-year bond futures tumbled 15 ticks to 95.68, the lowest since 2011. Markets are now seeing rates peaking at 4.43% early next year, up from 4.35% before the data release.

Commentary from the Reserve Bank of Australia has also turned more hawkish in recent weeks. Michele Bullock, the new RBA governor, on Tuesday warned that there were risks inflation would prove more stubborn than expected and interest rates might have to rise further to bring it to heel.

Policymakers have said they have a low tolerance for allowing inflation to return to target at a slower pace than currently expected. The central bank forecast in August that inflation was only projected to return to the top of the bank's target band of 2-3% in late 2025.

The central bank will release its updated economic forecasts in early November.

(Reporting by Stella Qiu andWayne Cole; Editing by Muralikumar Anantharaman & Shri Navaratnam)