What Causes Inflation (and Why Prices Never Come Back Down)

It has a cause. The official number doesn’t capture it.

By Blake Warren, Founder of The Bitcoin Warren

You check your savings account. The number is higher than it was five years ago. You have been disciplined. You cut back, said no to things, put money away when it would have been easier not to. The number grew.

And yet.

The house deposit that was two years away is now four years away. The grocery shop that used to come in under $200 now pushes past $280 for the same trolley. The holiday you planned at Christmas got quietly downgraded to a long weekend. The number in the account went up. What it can actually do went down.

The previous guide explained why. The dollar has been shrinking. Not the number printed on it. The purchasing power behind it. That process has a name: inflation. And inflation has a cause. Understanding what causes inflation in Australia changes how you look at every dollar you hold.

The cause is not bad luck, greedy businesses, or a supply chain having a bad year. Those things are real, and they come and go. The cause that never stops, the one that has been running in the background for decades, is that more money keeps being created. When more money enters the system and the amount of actual goods and services stays roughly the same, each dollar buys less. Every year. Permanently. By design.

That is not the explanation you were given. The explanation you were given is a number called CPI, the Consumer Price Index, and it consistently understates what is actually happening to the unit your wages and savings are stored in. Once you see the mechanism clearly, the question of where to keep what you earn becomes a different question entirely.

The word everyone knows. The mechanism almost no one can explain.

Ask ten people what causes inflation and you will get some version of “prices going up.” That is not a cause. That is a description of the symptom. Saying inflation is caused by rising prices is like saying a fever is caused by a high temperature. The temperature is the reading. The infection is the cause.

So what is the infection?

When more dollars enter the economy and the supply of actual goods and services does not grow at the same rate, each dollar buys a smaller share of what exists. Prices rise not because things got more valuable, but because the money competing for them became more abundant. More dollars chasing the same stuff. That is inflation. Not the number on the evening news. The mechanism underneath it.

The Auction Room

Picture an auction room. One painting on the wall. Ten people in the room. Each has $1,000. The bidding starts. The painting sells for around $1,000.

Now run the same auction. Same painting. Same ten people. But before the bidding opens, every bidder has $10,000 instead. The painting sells for around $10,000.

Nothing about the painting changed. The auctioneer did not get greedier. Nobody did anything wrong. The only thing that changed was the amount of money in the room.

That is what has been happening to the Australian economy for decades. The amount of money in the room keeps growing. The paintings, the groceries, the houses, the school fees, they do not multiply at the same rate. So the price of everything, measured in dollars, keeps rising.

In Australia, the total amount of money in the system is tracked by a measure called the money supply. The broadest standard measure, published by the Reserve Bank, is called M3. Think of it as the total number of dollars that exist in the economy: bank deposits, currency in circulation, and money held in accounts you can access quickly.

From 2000 to 2025, the Australian money supply grew from roughly $440 billion to over $3 trillion. More than seven and a half times larger. The auction got a lot more money in it. The paintings did not multiply seven times.

This is called monetary inflation. The previous guide called it something simpler: debasement, meaning the reduction of a currency’s purchasing power through expansion of its supply. The mechanism is the same: more money is created, each existing unit buys less, the face value stays the same, and the purchasing power behind it shrinks.

The number you are given, and the number that matters

When the news reports “inflation is 3.5 percent,” they are quoting the Consumer Price Index. CPI tracks average price changes across a basket of goods and services, compiled by the Australian Bureau of Statistics. It measures something.

But it is not measuring what happened to the unit your wages and savings are stored in. It is measuring what happened to a curated, periodically revised selection of consumer prices. Those are different things.

A tide gauge is supposed to tell you whether sea levels are rising. But bolt it to the side of a boat and it will always read calm water, even as the sea rises around you. The gauge is working perfectly. It just cannot tell you the sea is rising, because it is rising with you.

CPI is the gauge on the boat. It measures consumer prices from inside the system of consumer prices. The money supply is the tide gauge on the shore. It tells you what actually happened to the unit before any prices were set.

If you want to know whether your ruler is accurate, you do not measure it with itself.

From 2000 to 2025, the money supply grew more than seven and a half times. Consumer prices, on the official CPI measure, roughly doubled. One of those numbers tracks what happened to a curated basket of goods. The other tracks what happened to the unit your income, your savings, and your mortgage are all stored in.

Go back further. In 1971, the gold standard was dismantled. It had been the mechanism limiting how much money governments could create. The full story of how the gold standard ended and what replaced it is in The History of Money: Why It Keeps Breaking. From that year to 2025, the Australian money supply grew approximately 200 times. Consumer prices, on the official CPI measure, grew roughly 14 times. If those numbers were measuring the same thing, they would agree. They do not.

Productivity growth absorbed some of that expansion, which is why prices did not multiply 200 times. The relationship is not mechanical or instant either. Velocity changes, financial assets absorb some of the expansion, and lags vary. The structural direction, however, has been consistent for fifty years.

1971 is not a random starting point. It is the year the mechanism that put a ceiling on money creation was removed, which is exactly why it is the right baseline for measuring what happened to the unit. Most Australians were never told the ruler was changing at all, let alone how fast.

The median house price in Sydney was roughly $20,000 in 1971. It now trades for around $1.5 million. Most people read that as evidence that property is a great investment. It is more accurately evidence of what happened to the unit. At the money supply growth rate, that same $20,000 implies a value of close to $4 million. The house did not keep up with debasement. It just looks good measured in a shrinking ruler.

Those are not two measures of the same thing. One is the cause. The other is what happened to a basket of consumer goods. CPI does not measure what happened to the dollar. It measures what happened to the prices of selected things bought with it.

Why CPI feels wrong, and why that feeling is correct

You already know this intuitively. The official inflation number comes out at 3 or 4 percent, and you look at your rent, your groceries, your insurance renewal, your electricity bill, and the number does not match what you are living. There is a reason for that.

A thermometer measures temperature against a fixed physical standard, one that does not shift because a committee found the readings inconvenient. CPI has no equivalent. The basket of goods it measures is selected by a committee. The weightings assigned to each item are decided by a committee. The methodology for calculating changes is set by a committee. The committee that does all of this is the same institution whose performance is judged by the number it produces.

That is the measurement problem. There is also a composition problem.

The CPI basket reflects average national spending. Your household does not spend like the national average. If you rent, pay private health insurance, have kids in childcare, or carry a mortgage in a city where prices have tripled, your actual inflation rate is not the headline number.

When the price of an item in the basket rises sharply, the methodology assumes you switch to a cheaper alternative. Steak gets expensive, so beef mince replaces it in the basket. The index records a smaller movement than the cost of the meal you used to cook. You are not eating the same dinner. But the number says you are paying about the same.

Every methodology revision is documented by the ABS. Every change has a rationale. The changes - moving to geometric averaging, introducing substitution adjustments, annual reweighting - are each understood by economists to apply downward pressure on the reported rate. The cumulative direction is not contested.

Since the RBA introduced its 2 to 3 percent target in the early 1990s, the headline rate has spent most of its time inside that band. It briefly broke above it during the inflation surge of 2021 to 2022. Then, after the most aggressive rate rising cycle in a generation, it returned inside the band within two years.

The consistency is not accidental.

What the default would be

Prices rising every year feels natural. It is the only world most people alive today have ever known.

But it is not the default. In an economy with a stable, genuinely constrained money supply, the natural direction of prices is downward. When manufacturers get more efficient, the cost of making things falls, and those savings pass to the buyer. When agricultural yields improve, food costs less. When a new process cuts production time in half, the product gets cheaper. That is what productivity is supposed to do: make things more affordable over time.

Persistent, one-directional inflation only became the norm once the mechanism that constrained money creation was removed. When the supply of money can expand by decision, productivity gains get absorbed into the expanding unit. The efficiency happened. The manufacturer is producing the same thing for less. But the price does not fall, because more money is competing for what was produced. The gain disappeared into the money supply rather than showing up at the checkout.

This changes what inflation actually is. It is not the natural result of a growing economy. It is evidence that the money supply is growing faster than the economy. And it means that everything people assumed was getting more expensive was, at least partly, just being measured in a unit that kept shrinking.

The 2 to 3 percent RBA inflation target is not a ceiling. It is a floor. A guaranteed annual reduction in the purchasing power of every dollar saved. Not a risk. A design specification.

What causes inflation in Australia

Four causes of inflation get discussed. Money supply growth, demand-pull, cost-push, and expectations. Three of those get most of the airtime. Demand was too strong. Supply chains broke down. Workers expected prices to rise, so they asked for more, and businesses passed it on.

Those are all real. A drought can push food prices up. A pandemic can disrupt shipping. A war can spike energy costs. These cause temporary price rises that come and go.

The cause that does not come and go is money supply growth, monetary debasement by another name. More money being created, permanently, every year, for decades. That is the structural driver. A supply shock spikes prices for a year and reverses. Money supply growth has been compounding for fifty years. One of those is the headline. The other is the structure underneath it.

That expansion reaches you through businesses. When the cost of everything a business buys keeps rising, it has three responses: raise the price on the label, put less in the package for the same price, or reduce the quality of what is inside it. All three mean you get less for the same dollar. The one that gets noticed least is the second, because the label does not change. The packet looks the same. The quantity does not. This is called shrinkflation. It is not a decision made in isolation. It is the arithmetic response to a unit that keeps losing purchasing power.

Notice which cause gets the least discussion. Demand-pull and cost-push can be blamed on external factors: weather, conflict, bad luck. Money supply growth points toward institutional decisions. Those decisions have identifiable authors, identifiable beneficiaries, and fifty years of documented outcomes.

Governments create money directly through deficit spending, borrowing against future tax revenue and financing it through bond markets. But the larger mechanism runs through commercial banks. When a bank approves a home loan, it does not hand over money from a vault. It creates new money as a deposit in the borrower’s account. That is the documented, operational mechanism of the banking system. It operates within a framework the central bank sets, controls, and adjusts. A future guide in this series explains how it works in detail.

Counterfeiting is the unauthorised creation of money. Monetary policy is the authorised expansion of money within the system. The legal status is completely different. The effect on existing dollars still needs to be understood: more units exist, so each existing unit competes for a smaller share of what is available.

Why you don't feel it until it's too late

You spend four hours at the beach. The sun feels manageable at midday. You decide you are fine. By evening you cannot touch your shoulders.

The exposure happened in full daylight. Nobody hid it from you. The damage registered hours after the window to do anything about it had closed.

Between December 2019 and December 2021, the Australian money supply grew by 23 percent, roughly three times its normal rate. Consumer prices followed twelve to eighteen months later, producing the inflation surge of 2021 to 2022. By the time your grocery bill spiked, the money that caused it had already been circulating for over a year.

The money is created first. Asset prices respond immediately, because financial markets move quickly. Consumer prices follow later. CPI catches the movement after the fact. The money supply data showed it in advance.

The data is public. It is published monthly by the RBA. It is just not the number that makes the evening news.

Why prices never come back down

When a business raises its prices, it does not lower them when cost pressures ease. When wages rise, employers do not cut them when inflation falls. Leases reset upward. Insurance premiums step up. Childcare fees increase each year. None of them come back down. The system has no reverse gear. Every price rise is permanent. The rachet only turns one way.

What this looks like over a lifetime

You put $100,000 into savings. You do not touch it. You leave it sitting there, doing exactly what a savings account is supposed to do. Here is what happens to it, depending on which measure you use.

The RBA targets 2 to 3 percent inflation per year. Two and a half percent sounds modest. At the midpoint of 2.5 percent, your $100,000 is worth $78,000 in purchasing power after ten years. $61,000 after twenty. $48,000 after thirty, meaning more than half extracted without a single transaction. That is the plan. That is what “price stability” looks like, compounding every year, by design.

Now apply the rate that describes what actually happened to the unit. The money supply grew at a compound annual rate of 10.30 percent per year from 1971 to 2025. At that rate, $100,000 becomes $37,500 after ten years, $14,000 after twenty.

That is ninety-five percent gone. No crash required. No bad decision. Just holding money in the only place most people were told was safe.

The tax that nobody voted for

There is a name for this. It is called the inflation tax. It does not appear on any bill. It was never debated in parliament or put to a public vote. It arrives automatically, every year, on every dollar held in cash or a savings account.

It transfers purchasing power from people who save in cash to people who borrow and people who hold assets whose prices rise with the expanding money supply. Borrowers repay their debts in dollars worth less than when they borrowed them. Asset owners hold property and shares that are repriced upward as the unit shrinks. The saver holds dollars. The dollar is the thing losing value.

Governments are the largest borrowers in the economy. When the money supply expands, the real cost of government debt falls too. No legislation required, no debate, no line item in any budget. The inflation tax is the mechanism. The largest borrower in the economy also sets the rate.

The person who could not afford to save anything gets hit on their wages: each pay packet buys a little less than the last. The person who saved diligently for twenty years gets hit on everything they stored.

The reward for decades of financial discipline is a larger exposure to the punishment.

The RBA’s 2 to 3 percent target is presented as price stability. What it actually describes is a guaranteed, continuous, institutionally mandated erosion of the value of every dollar you save. Not volatility. Not a temporary risk. A floor. The purchasing power of cash savings is designed to fall over time. The only question is how quickly that erosion compounds.

The goal was never zero inflation. The system was designed to require ongoing debasement. A future guide covers exactly why. And who that design benefits most.

What changes once you see this

Most people go through life asking: why does everything keep getting more expensive? Once you understand the mechanism, the question changes. It stops being about prices and starts being about the unit. What happened to the dollar? Who expanded the supply? How fast? And is there any form of money where that cannot happen?

That last question has one honest answer. Not all money has an expandable supply. The properties that make a currency hard to expand are not complicated. They are just absent from the one you are currently using.

You now understand what inflation is, where it comes from, and why the official number understates it. The mechanism that keeps expanding the money supply works on something specific: the hours you have already worked and saved. What happened to those hours is what the next guide answers.

KEY TAKEAWAYS

The supply expands. The unit shrinks.

The official measure tracks a basket, not the unit.

The damage arrives on delay.

Prices ratchet, they never reverse.

The target is debasement

Common Questions

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