"A 75bp hike at the August 17 monetary policy statement is a very real possibility,
particularly if the labour market data on August 3 delivers another hawkish surprise," the bank added.
New Zealand's swaps curve turned negative on July 7 and became more steeply inverse in response to the data.
Overnight index swaps - a derivative - pointed to a 65 per cent chance of a 75 basis point rate hike come August 17.
The shape of the swaps curve showed that the long end is pricing in a hard landing for the economy while the short end is pricing in rate hikes.
The two year swaps market - a key driver of fixed-term home mortgage rates - went to 4.165 per cent after the CPI's release from 4.05 per cent beforehand.
Five-year swaps went to 3.93 per cent from 3.84, and 10 years to 3.90 per cent from 3.83.
ANZ strategist David Croy said the markets' reaction was "completely understandable".
"The CPI data was stronger-than-expected and stronger than the Reserve Bank had pencilled in," he said.
"The market is going to be nervous here and is keenly debating the prospect of another 50 basis point hike and the need for more hikes."
ASB senior economist Mark Smith said rates had lifted across the curve.
"We have seen the whole curve shift up but certainly it has been led by the short end, so we have seen the curve further invert.
"That's a signal that an economic slowdown has become more and more of a base case scenario for the markets," he said.
"And they see the risk of that building going forward," Smith said.
"It will reinforce those views that the economy is in for a hard landing, with inflation having become more entrenched.
"You have got the threat of stagflation starting to come through in market pricing."
In the Government bond market, yields were up, making for a flatter yield curve.
Two-year bond yields were at 3.64 per cent from 3.57 per cent before the CPI.
Five-year bonds went to 3.62 per cent from 3.58 and the 10-years to 3.68 per cent from 3.65.
The New Zealand dollar was static at first but then rallied by about one-third of a US cent to US61.91c after the release.