BY WEALTH ADVISER
For many Australians, the pandemic years blurred into a confusing mix of government support, low interest rates, surging house prices and, later, a sharp jump in the cost of living. Economists have argued fiercely about why inflation rose and whether it is truly under control. One of the clearest voices in this debate has been Professor Tim Congdon, whose work focuses on the growth of “broad money” – the total stock of bank deposits and similar money‑like assets in the economy – rather than just interest rates or government spending. In a recent Firstlinks article, he argues that the rapid surge in money growth during 2020 and 2021 helped to create the inflation that followed, while the subsequent stagnation in money growth explains why inflation later eased back.
For everyday savers and borrowers, these ideas can sound distant from daily life. Yet the story of broad money, quantitative easing and quantitative tightening is ultimately about how much purchasing power is coursing through the financial system and how that power shows up in the prices of groceries, mortgages, rents and investments. The aim of this article is not to take sides in academic debates, but to use Congdon’s framework, together with material from the Reserve Bank of Australia (RBA) and the International Monetary Fund (IMF), to explain in plain language how money growth connects to inflation and interest rates – and what that might mean for household decisions in the years ahead.
From “money printing” to your household budget
Professor Congdon’s core claim is simple: when the amount of broad money in an economy grows much faster than the economy’s ability to produce goods and services, inflation tends to rise; when money growth slows or reverses, inflation tends to fall. In the United States, he points to a period in 2020 when the Federal Reserve’s bond purchases were so large that broad money on a widely‑used measure jumped by more in a single month than in any full year during the previous decade, followed by a long period from 2022 where money growth was close to zero. Inflation ini‑ tially climbed to multi‑decade highs, then declined towards central bank targets as money growth stalled.
Broad money sounds technical, but for households it largely consists of the balances held in transaction accounts, savings accounts, term deposits and other money‑like instruments with banks and similar institutions. The RBA notes that when banks create new loans they also create new deposits, so strong credit growth typically shows up as faster growth in broad money. In practical terms, when interest rates are slashed and lending standards are relaxed, more borrowing occurs, more deposits are created and more money competes for a limited supply of goods, services and assets. That is one reason why the period of very low interest rates in 2020 and 2021 coincided with surging housing prices and, with a lag, higher everyday prices.
How QE and QT move from the central bank to everyday prices
The mechanics of quantitative easing (QE) and quantitative tightening (QT) sit at the heart of Congdon’s story. QE is the process by which a central bank buys government bonds and other securities from the financial sector, paying for them by creating settlement balances that support more deposits and, indirectly, more lending. Congdon highlights how, in 2020, the Federal Reserve’s holdings of securities rose by over a trillion US dollars in a matter of weeks, and then kept climbing until 2022, helping push broad money sharply higher. Once inflation had taken hold, the central bank reversed course, allowing its bond holdings to shrink and thereby slowing money growth.
The RBA did something similar, though on a smaller scale. Its own explainers describe how QE in Australia involved large‑scale purchases of government bonds, which lowered longer‑term interest rates and encouraged borrowing and risk‑taking, while QT – the decision not to reinvest maturing bonds and, later, to allow its balance sheet to run down – pulled in the opposite direction. These balance‑sheet actions operate alongside the more familiar setting of the cash rate, which influences the interest rates charged on variable mortgages, personal loans and savings accounts. Over time, the mix of QE, QT and cash‑rate changes affects household borrowing costs, deposit returns, asset prices and eventually inflation.
For a household, the chain can be summarised as follows. QE makes it easier and cheaper for governments and businesses to raise money and tends to lower interest rates across the economy, which can lift asset prices and encourage borrowing. QT and higher policy rates do the opposite, making it more expensive to borrow and moderating demand. These effects are not immediate; central banks and the IMF both emphasise that it can take one to two years for changes in money growth and interest rates to flow fully through to inflation. That lag is one reason the period of strong money growth in 2020 and 2021 translated into higher inflation mainly in 2022 and 2023, while today’s policy settings will shape inflation outcomes over the next several years rather than overnight.
Broad money, inflation, and Australia’s 2–3% target
The connection between money growth and inflation is not unique to the United States. Firstlinks has carried several analyses arguing that a “forgotten” indicator – Australian broad money growth – has historically lined up well with the ups and downs of inflation. In those pieces, broad money growth running comfortably above nominal economic growth, particularly into double‑digit territory, tended to precede periods of higher inflation, while moderate money growth was associated with inflation within or near the RBA’s target. Although the relationships are not perfect year by year, they provide a useful cross‑check on more familiar indicators such as wages, unemployment and commodity prices.
Congdon’s recent commentary extends this reasoning. He argues that with QT now winding down in the United States, and large fiscal deficits still being financed through the banking system and money market mutual funds, money growth is likely to settle into the high single digits. In his view, that rate of expansion in the money stock is simply incompatible with maintaining inflation at 2 per cent; instead, he expects inflation to hover in a band closer to 2–5 per cent while current policies persist. For Australian readers, the key question is whether a similar pattern might play out locally if money and credit growth continue to accelerate from the subdued pace seen in the immediate aftermath of the pandemic.
The RBA’s formal inflation target, as explained in its education material, is to keep consumer price inflation between 2 and 3 per cent on average over time. That word‑ ing is deliberate. It allows inflation to move above or below the band in response to shocks, so long as the central bank aims to guide it back towards the middle over a reasonable horizon. According to recent Statements on Monetary Policy, inflation in Australia has come down from its peak but remains above target, with the Bank expecting a gradual return to the band if policy remains sufficiently restrictive. From a monetarist perspective, that forecast implicitly assumes that money and credit growth will not re‑accelerate in a way that reignites inflationary pressure.
What renewed money growth could mean for savers and borrowers
If broad money in Australia were to grow substantially faster than the economy again, the concern is that inflation could prove more stubborn than hoped, even if headline figures temporarily dip. Congdon’s analysis suggests that when large government deficits are financed in ways that boost bank deposits and near‑money assets, and central banks are no longer shrinking their balance sheets, it becomes harder to keep money growth in check. In that environment, inflation might well settle at levels that feel uncomfortably high to those on fixed incomes or with large cash holdings, even if it is no longer surging.
For borrowers, including mortgage holders, the link between money growth and inflation matters because it influences where interest rates may need to sit over the long term. The RBA and other central banks have been clear that policy is “forward‑looking and data‑dependent”, meaning that rates will stay higher for longer if inflation does not convincingly return to target. Research from the RBA on the household cash‑flow channel of monetary policy shows that in an economy with a high share of variable‑rate mortgages, changes in the cash rate rapidly alter the disposable income of many households, amplifying the impact of each rate move. If money growth remains strong and inflation only slowly declines, households may need to live with higher nominal rates than they became used to in the decade before the pandemic.
Savers face a different, but related, challenge. A term deposit rate that looks attractive on the surface can erode purchasing power once inflation and tax are taken into account. Using the simple framework set out in the notes to the Firstlinks article, a worker on a marginal tax rate of 47 per cent earning 4.5 per cent interest in an environment of 5 per cent inflation would experience a negative real after‑tax return, because the combination of tax and rising prices outweighs the nominal income. In that situation, it may feel as though money is “standing still” or even going backwards, despite the apparent improvement in headline rates compared with the near‑zero levels of 2020.
Practical steps for building resilience when money matters again
None of this means that households should try to forecast broad money growth month by month or make dramatic portfolio shifts based on a single indicator. Monetary policy, fiscal decisions and global events interact in ways that are difficult to predict, and even the strongest analytical frameworks can be wrong for a time. However, understanding that inflation is related to the interaction between money growth and the real economy can help investors interpret headlines about rate decisions, budget deficits and central‑bank balance sheets with a little more clarity. It also encourages a focus on real, after‑tax outcomes rather than just nominal figures.
For borrowers, one simple resilience measure is to test how household finances would cope with higher interest rates than today, particularly if money and credit growth remain firm. This might involve checking whether repayments would still be manageable if the mortgage rate rose by one or two percentage points, building an emergency buffer in an offset account, or accelerating principal repayments when possible. Research on Australia’s mortgage market suggests that many households have built “shock absorbers” in the form of prepayments and redraw balances, but these buffers are unevenly distributed and can be run down over time if rates stay elevated.
Savers and investors, meanwhile, can think about constructing portfolios that are less vulnerable to a single in‑ flation or interest‑rate scenario. This could mean staggering term deposits so that only part of the cash is locked in at any given time, combining cash with a mix of high‑quality bonds and growth assets, or ensuring that retirement income plans do not rely entirely on stable, low inflation. IMF work on the distributional impact of inflation notes that those on fixed nominal incomes are often hardest hit when inflation surprises on the upside, while those with diversified assets and moderate debt tend to be better placed. Diversification is not a guarantee, but it is one of the few tools households can control.
Above all, it may help to pay at least occasional attention to indicators that rarely make the nightly news, such as broad money growth, alongside more familiar measures like the cash rate and the consumer price index. If money is expanding rapidly while inflation remains elevated, it may be prudent to assume that higher nominal interest rates could remain part of the landscape for some time. If money growth slows and inflation comes back towards target, the pressure on rates is more likely to ease. For retail clients of Australian financial advisers, using this broader picture as a backdrop to conversations about debt, savings and investment can support decisions that are more resilient, regardless of which inflation camp – transitory or persistent – ultimately proves correct.
References
• Tim Congdon, “I called inflation’s rise and fall and here’s what’s next”, Firstlinks, 25 November 2025.
• “This vital yet ‘forgotten’ indicator of inflation holds good news”, Firstlinks, 9 July 2024.
• Reserve Bank of Australia, “In a Nutshell: Money, Credit and Velocity”, Education resources.
• Reserve Bank of Australia, “What is Monetary Policy?”, Explainer, 7 August 2018.
• International Monetary Fund, “Inflation: Prices on the Rise”, Finance & Development, Back to Basics series.
