The chart that changed how I think about inflation in Australia. 4/12

A few years ago, I came across a chart that fundamentally changed how I think about inflation.

Not because it was dramatic. Not because it predicted collapse.

But because it quietly explained why so many Australians feel like they’re working harder while getting further behind over time.

The chart was Australia’s M3 money supply over the past 50 years.

Before I show it, we need to clear something up first — because I think a lot of people have been taught to think about inflation the wrong way.

Most people hear the word “inflation” and immediately think: “Prices are going up.”

But that’s actually the effect of inflation, not the underlying cause.

It's like saying that the ocean is rising because the waves are high.

Traditionally, inflation referred to the expansion of the money supply itself — the increasing amount of currency and credit flowing through the economy over time.

Prices rising are simply what tend to happen afterwards.

That distinction matters.

Because if you only look at CPI figures each quarter, you can miss the much larger structural story underneath.

CPI attempts to measure the change in prices of a selected basket of goods and services. It’s useful in some contexts, but it can also smooth over the lived experience of families trying to buy houses, raise children, save for retirement, or simply maintain purchasing power over long periods of time.

And this is where the M3 chart becomes important.

M3 is one of the broadest measures of money supply in the economy. It includes physical currency, bank deposits, and large parts of the credit system. When you look at Australia’s M3 money supply over the last 50 years, you don’t see a steady flat line.

You see a river that gradually becomes a flood. At first, the increase looks manageable. Then over time, the scale becomes difficult to ignore.

More dollars. More credit. More liquidity moving through the system year after year.

Now importantly — this isn’t necessarily about blame. Modern economies are designed this way. Governments stimulate. Banks lend. Credit expands. Population grows. Businesses invest. The economy becomes larger and more complex over time.

But regardless of the reasons, the practical outcome for everyday Australians is this: 'If the supply of money grows continuously over long periods, each individual unit of money tends to buy less over time. And if you think CPI pay rises will allow your family budget to keep up, but total money supply is growing twice as fast, you are going to feel like you are going backwards.'

And this graph shows how the delta between CPI and M3 can compound over time.

Next Post in this series we'll dive in and discuss the implications of these two lines on your family budgets.

Find earlier posts in this series at https://lnkd.in/gMVi3KkE

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Originally posted on LinkedIn - https://www.linkedin.com/posts/adampoulton_inflation-m3moneysupply-cpi-share-7459770965464387584-ArA-?utm_source=share&utm_medium=member_desktop&rcm=ACoAAAcjRtYBrFW4hwiQ4I5TfiqudKutL4tUzP8