M2 and inflation
M2 is used as an indicator of possible increases or decreases in inflation levels. This is because it is a broader measure of the money supply in an economy than when compared with M1 – which only looks at money that is in the hands of the public.
As a result, M2 offers a more comprehensive overview of inflation levels because if the M2 monetary supply is increased, inflation could rise. Equally, if M2 supply is restricted by central banks, inflation could fall. However, it is generally accepted that there is a lag of between 12 to 18 months for inflation levels to respond to increased monetary supply.
Also, inflation will only rise if monetary supply is increased but economic output remains the same. If economic output increases alongside money supply, then inflation might not increase at all.