Quantity Theory of Money Explained for Australians (2025 Guide)

The phrase “money makes the world go round” might sound cliché, but in economic circles, the Quantity Theory of Money (QTM) is the engine behind that spin. As the Reserve Bank of Australia (RBA) and global central banks battle inflation in 2025, understanding QTM isn’t just for economists—it’s crucial for anyone watching their bank balance.

What Is the Quantity Theory of Money?

At its core, the Quantity Theory of Money links the money supply with the price level of goods and services. The most famous expression is the equation MV = PQ, where:

• M = Money supply
• V = Velocity of money (how often money changes hands)
• P = Price level
• Q = Real output (goods and services produced)

If you increase the amount of money in circulation faster than the growth in goods and services, prices tend to rise—that’s inflation in a nutshell.

QTM and Australia’s Inflation Challenge in 2025

After a rollercoaster of global supply shocks, Australia’s inflation rate remains a hot topic in 2025. The RBA’s ongoing efforts to tame inflation involve adjusting interest rates and managing the money supply—textbook QTM territory.

• 2025 Policy Update: The RBA has kept the cash rate steady at 4.35% for the first half of the year, signalling a ‘wait and see’ approach as wage growth slows and inflation stabilises just above its 2–3% target range.
• Recent data from the Australian Bureau of Statistics (ABS) shows money supply growth has moderated, following aggressive rate hikes in 2023–24.
• The velocity of money, suppressed during the pandemic, is creeping up as consumer confidence returns and households dip into savings.

For everyday Aussies, this means the cost of living is still a concern, but runaway price hikes seen in 2022–23 are easing.

Is the Quantity Theory Still Relevant?

Critics argue the QTM is too simplistic—after all, money doesn’t circulate at a constant velocity, and central banks can’t control every economic variable. But in 2025, the theory still informs much of the RBA’s thinking. Here’s how:

• Interest Rate Policy: The RBA uses QTM logic to predict how changes in the money supply will affect inflation and growth.
• Quantitative Tightening: The gradual wind-down of pandemic-era stimulus means less ‘easy money’ sloshing around, which aligns with QTM predictions that tightening the money supply helps curb inflation.
• Global Context: The European Central Bank and US Federal Reserve are following similar playbooks, making QTM a global economic touchstone in 2025.

Real-world example: When the RBA paused its rate hikes in March 2025, mortgage holders breathed a sigh of relief, but policymakers warned that a spike in lending or rapid wage growth could reignite inflation—classic QTM dynamics in action.

What Does This Mean for Your Money?

While the QTM might sound academic, it has direct implications for your savings, mortgage, and spending power:

• Fixed vs Variable Loans: If money supply growth remains contained, interest rates may stay steady. But if economic activity picks up rapidly, rates could rise again.
• Investment Choices: Understanding how inflation and money supply interact can help you choose between shares, property, or term deposits.
• Wages and Prices: Slower money supply growth tends to moderate wage increases but also keeps everyday expenses in check.

Keep an eye on the RBA’s monetary policy statements—they’re effectively the playbook for how QTM gets applied in real life.

Conclusion

The Quantity Theory of Money isn’t just an economic relic—it’s a practical tool for making sense of Australia’s financial landscape in 2025. Whether you’re a homeowner, investor, or just watching your weekly grocery bill, understanding QTM can help you navigate inflation, interest rates, and the broader economy with confidence.