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M2 money supply could be a better measure of inflation than CPI

fed m2

When markets turn red and inflation starts soaring, both regulators and consumers turn to CPI as a gauge for the damage done by soaring prices but in the chaos that ensues as markets enter into a recession, one metric always seems to be overlooked — the M2 money supply.

The M2 is a measure of the money supply in an economy that includes cash and checking deposits, savings deposits, money market securities, and various other time deposits. The assets included in M2 are less liquid than M1, which includes just cash and checking deposits, but are usually liquid and can be quickly converted to cash.

Central banks use M2 to shape monetary policy when inflation arises, making it one of the most important metrics when economies start to slow down.

Looking at the data from the U.S. Federal Reserve shows that M2 has been growing exponentially since 1980. Every time the Federal Reserve attempted to reduce its balance sheet recession ensued. Periods of recession have historically sped up the growth of M2, as the Fed’s quantitative easing approach increased the supply of money in the economy.

This is evident in the Fed’s data — gray areas on the graph below indicate periods of recession and show the increase in M2.

fed m2
Graph showing the M2 money supply in the U.S. from 1980 to 2022 (Source: The Federal Reserve)

Many economists believe that M2 is a much better gauge for inflation than CPI. The coveted consumer price index tracks the average increase across a basket of consumer products and is used to estimate the average increase in prices consumers experience.

However, CPI presents average increases and has a tendency to show a much lower price increase than consumers actually experience.

The latest numbers put the CPI increase at around 8%. However, consumers have felt a price increase that far exceeds 8%. Looking at the increase in M2 paints a much more realistic picture of price increases.

The year-over-year increase in M2 currently stands at above 25% and feels more in line with what consumers experience.

m2 bitcoin
Graph showing the YOY increase in M2 (Source:

The growing M2 money supply isn’t only a gauge for inflation — it’s also a solid indicator of Bitcoin’s performance.

The global M2 plays a key role in Bitcoin’s price movements — when it shrinks, Bitcoin’s price drops. When the M2 grows, Bitcoin’s price grows as well.

Looking at the data for the Federal Reserve, the European Central Bank (ECB), and the Bank of Japan (BOJ) shows…

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