M1 consists of currency in circulation outside bank vaults plus overnight deposits that non-banks hold withbanks. M1 does not include bank reserves. M1 represents most liquid form of money - what private households and firms need to purchase goods, services or assets.
The non-M1 components of M2 are primarily household savings deposits, time deposits, and retail money market mutual funds.
The Unreliability of Inflation Indicators found that the inclusion of a commodities price index, M2 and average hourly wage growth consistently increased the precision of inflation forecasts.