Consumer Barometer suggests a QE moratorium

• Inflation expectations in April rose to a seven-month high, while job security was the strongest for a year, though job prospects eased slightly.
• Although the jobs indicators have improved since the end of 2011, they remain weak compared with pre-financial crisis level. 
• The current survey results are more consistent with the period between QE1 and QE2, i.e. a pause in BoE asset purchases rather than a further expansion of QE.  
• The likelihood of further QE is much more finely balanced than three months ago  

INFLATION EXPECTATIONS RISE AGAIN, WHILE JOB SECURITY IMPROVES FURTHER

Inflation expectations rose for the third straight month and to the highest level since last September, as measured by the net balance of consumers expecting higher prices in the coming year, which increased to 75% from 70% in March. This suggests that inflation may not fall as quickly as indicated in the latest Bank of England Inflation Report and is therefore likely to be uncomfortable news for policymakers, who are also contending with official data showing the economy fell into technical recession in Q1.

Job security in our survey, however, improved for a fourth consecutive month, rising to -18% from -21%, suggesting that fears of redundancy declined to the lowest level for a year, although job prospects fell slightly in April to -59%, following the sharp increase to -58% in March. Overall, both employment indicators in our survey have improved since the end of 2011, but they remain weak compared with pre-financial crisis levels.

A LIKELY PAUSE IN QE?

An important question is whether the Consumer Barometer is signalling more QE, possibly as soon as the May MPC meeting. It is likely to be a much closer call this time than at the February meeting when a further £50bn of QE was announced. Charts A and B suggest that the recent improvements in both the job prospects and job security balances compared with the end of last year may be sufficient to allow policymakers to adopt a ‘wait and see’ approach. In addition, chart C shows that inflation expectations have started to drift higher, providing a further constraint on an immediate expansion in QE.

Chart D shows the net balances for job prospects, job security and expected prices for two periods: (i) during QE, i.e. the net balances available ahead of the announcement of further asset purchases¹ and (ii) during no QE, i.e. between the end of QE1 and the start of QE2 (February 2010 to September 2011). The diamonds represent the latest net balances. What can be inferred is that the current net balances, in particular for expected prices and job prospects, are more consistent with the ‘no QE’ period.  

Thus, a simple analysis of the key results from our Consumer Barometer suggests that the recent improvements in the employment indicators and the increases in inflation expectations are likely to lead to a moratorium in the Bank of England ’s asset purchase programme, although it could be a close call. The likelihood of further QE later in the year will depend on economic developments, including whether the recent trends in the Consumer Barometer continue or are reversed.

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