It is almost for sure a bad wear ring unless prop was made out of spec. Also check that your wear ring is evenly seated against the pump stator. Old silicone, corrosion, etc. can hold wear ring from fully seating on part and cause this issue as well. Do not grind the liner except as a temporary solution until wear ring can be replaced. Otherwise the swell will continue and ruin your new impeller outer edge.
From our pump parts thread:
Wear Ring Information
'Wear ring' is bit inaccurate or misleading term. The OEM 'wear ring' is made of cast aluminum with a very thin stainless steel liner. The liners actually wear very little (if at all). It is the outside edge of the impeller that wears when sand, shells, dirt, etc. are run through the pump. The wear ring (yamaha calls it an 'impeller housing') should not touch the impeller at all.
Oem wear rings are reliable and offer great performance, but they are pricey to replace (new retail $274.) and fail with saltwater and occasionally freshwater usage. Oem wear rings fail from the Galvanic corrosion (
http://en.wikipedia.org/wiki/Galvanic_corrosion) which occurs between the housing and the liner, causing the liner to swell and collapse into the impeller. Oem wear rings used in saltwater will always swell and fail, sometimes quickly. Inspection will reveal high spots rubbed by the impeller and the impeller edges will have rough hangers on the edges. In an assembled ski, you can listen carefully just after shutting off your motor for the 'ding, ding, ding' of the impeller grinding on the wear ring. (ski must be out of the water) The impeller should never touch in an oem wear ring, if it does, then it is bad.
The Solas all SS wear ring is a 'forever' wear ring because the solid all SS constuction won't ever go bad.
A/M wear rings with replaceable plastic liners are true 'wear rings.' The liners will wear as sand, etc. is passed through the pump. Are they better or worse? Advantages include lower cost, much lower impeller wear and no issues with corrosion in saltwater. Disadvantages are once the liner wears too much, then your pump performance will suffer, and also periodic liner replacement is required.
If you ride salt alot and also the type to run lots of sand, etc. through your pump, then a/m wear ring may be a good choice both to protect impeller and to lower costs.
Both WSM and SBT make wear rings with replaceable plastic liners.
