Producer price figures for October raise further concerns about inflation prospects. "Core" output prices – i.e. excluding food, beverages, petroleum and tobacco – rose by 0.3% on the month following a 0.5% September gain, pushing annual growth to a six-month high of 2.0%.

Recent solid monthly increases are unusual for this time of year. The chart shows annual growth together with a three-month rate of change based on an attempt to adjust the raw numbers for seasonal variation. This latter series has surged to an annualised 7% – the highest since July last year.

This pick-up conflicts with the official and consensus view that large-scale excess capacity will pull core inflation lower, offsetting upward pressure from the weak exchange rate, rising commodity input costs and supply-chain disruptions due to insufficient working capital. Companies may be attempting to push through faster price increases under cover of the further fall in the pound since the summer and the coming hike in VAT.

The Monetary Policy Committee has delivered a minimal further easing of policy by raising its gilt-buying programme by £25 billion to £200 billion. The additional purchases will be spread over three months, implying a slowdown to half the recent pace, and no additional authority beyond £200 billion has been requested. The message seems to be that this will be the final slug barring an economic shock. The statement contained no reference to any change in current arrangements for paying interest on bank reserves.

Today's decision is questionable in two respects. First, an additional £25 billion of buying spread over three months will have minimal effects relative to a policy of suspending purchases now. If the MPC really believes that further stimulus is required, the debate should have been between £50 billion and £75 billion, as it was in August.

Secondly, the suggestion that additional buying is warranted by the MPC's updated inflation projection lacks credibility. In August, it forecast that inflation would be above 2% and rising in two years' time. Since then, inflation outturns have been higher than expected, sterling has weakened and commodity prices have strengthened. By lowering its projection, the MPC appears to be placing even more weight on a simplistic "output gap" inflation model, despite its recent forecasting failure.

The economic surprise of the last six months has been the strength of the rebound in global industrial activity. The surprise of the next six months could be the speed of the turnaround in labour markets.

A fundamental reason for optimism is the impressive recovery in company finances, which should encourage more expansionary behaviour. In the US, the corporate financial balance – the difference between retained earnings and capital spending – has moved from a deficit of 2.1% of GDP in the first quarter of last year to a surplus of 1.1% by this year's second quarter. Excluding the third and fourth quarters of 2005, which were distorted by a one-off repatriation of foreign profits to take advantage of temporary tax incentives, this is the highest since the fourth quarter of 1960. The financial balance is a leading indicator of employment – see first chart. The equivalent UK balance has also moved into surplus.

Trends in temporary employment often provide early warning of changes in labour demand. US "temporary help" jobs fell by just 2,000 in September versus a prior six-month average of 26,000. The American Staffing Association's staffing index, moreover, has recovered strongly in recent weeks, suggesting that Friday's payrolls report for October will show a rise in temporary jobs – second chart. (The index is a survey-based measure of demand for short-term and contract workers; the series in the chart has been adjusted for seasonal variations.)

In the UK, the Markit / Recruitment and Employment Confederation Report on Jobs survey for October released today showed a further recovery in demand for both temporary and permanent staff. The permanent placements index is well above the break-even 50 level, suggesting a stabilisation and recovery in private-sector employment over coming quarters – third chart. Purchasing managers' employment indices – coincident rather than leading indicators – remained below 50 in October but improved from September.

The strong consensus in favour of central bank policies staying "loose for long" rests on a forecast of continuing labour market weakness. An earlier-than-expected return of jobs expansion would boost confidence in the sustainability of the economic recovery but could signal the end of the liquidity-driven rally in markets.

The percentage balance of consumers expecting higher inflation over the next year has risen from -5% in July to +4% in October, according to the EU Commission survey. The current balance, while still depressed by historical standards, is the highest since November last year – see chart.

It is tempting to discount the recent increase as a reflection of the coming VAT hike. The latest Citigroup / YouGov survey, however, shows that longer-term inflation expectations have also firmed, with the average forecast rising from 2.8% in January to 3.2% in October.

There is a danger that expectations are moving higher partly because of doubts about the Bank of England's ability or willingness to achieve the 2% inflation target over the medium term. The Bank's inflation forecasts have been consistently too low in recent years while its gilt-buying may have raised concerns about policy independence.

The survey measures are influenced by current inflationary trends and have historically correlated more closely with retail than consumer prices. Headline RPI inflation is likely to rise from -1.4% in September to 3% or more by next spring as a result of the VAT hike and unfavourable energy, house price and mortgage rate effects – see previous post.

Inflation expectations are an important influence on the Bank's policy decisions – the EU Commission measure is a component of the "MPC-ometer" model for forecasting interest rate changes described in earlier posts. The recent increase is a further argument against an expansion of gilt purchases at this week's meeting.

Recent posts have argued that the Bank of England should not and probably will not expand asset purchases at its meeting this week. A range of evidence suggests that monetary conditions are sufficiently and possibly excessively loose. The Bank, meanwhile, faces difficulty in justifying a further extension given medium-term inflation prospects.

By contrast, 43 out of 62 economists polled by Reuters last week expect more asset-buying, with the majority split between a £25 billion and £50 billion increase. The Sunday Times Shadow MPC, which is often a good guide to the Bank's thinking, is also strongly in favour of an extension – see David Smith's blog for details.

This week's purchasing managers surveys for October are likely to be an important influence on the decision. As mentioned last week, earnings revisions pointed to strong results; the manufacturing survey this morning duly surprised positively, with the leading new orders component rising to its highest level since January 2004.

The companion survey covering the larger services sector will be released on Wednesday. Suppose, however, that the new business component is unchanged from its September reading. A weighted average of manufacturing new orders and services new business would then reach its highest level since September 2007 – two months after the final interest rate increase in the last tightening cycle. 

The chart shows Bank rate together with this new business indicator, with the last data point incorporating the services assumption. The MPC has eased policy only once with the indicator at or above its implied October level – in February 2001. Consumer price inflation, however, was then below 1% (and undistorted by VAT effects) while the US economy was entering, not exiting, a recession.