The European Central Bank is worried about inflation - shouldn't we be too?

A monetary union without fiscal union, combined with the aftermath of a credit splurge and then vicious retrenchment, was always going to create austere conditions and unemployment - the end of which is deflation.

This is the chilling conclusion one might draw from the fact that even the ECB has now got the message and has begun to reinforce its forward guidance that rates will still be at present levels or lower for a considerable period of time. Yet even now we didn't get the Full Monty - a move to negative deposit rates is what the peripheral countries now desperately need. Before they joined the Euro they would have been able to regain some degree of competitiveness via devaluation - now the only way out for them is mass, long-term unemployment, while structural reforms to their labour markets take hold - if they ever do. A cut in the Depo rate would begin to seriously weaken the Euro, replicating the pre-Euro solution for the periphery.

After a shock to the system as large as the credit crisis, perhaps the real surprise is that this has taken so long to become evident; the scale of the inevitable de-leveraging process that was always going to have to take place would classically suggest this outcome, but then we have to add to the mix the fact that the Eurozone (13.5 per cent of global GDP in 2012), is saddled with a massively deflationary economic experiment, in the shape of the Euro.

One has to say the whole thing is becoming painfully reminiscent of the Bank of Japan's failure to take bold steps in the face of the imminent arrival of deflation in the 1990s, despite the yen’s ludicrous strength.  

A monetary union without fiscal union, combined with the aftermath of a credit splurge and then vicious retrenchment, was always going to create austere conditions and unemployment - the end of which is deflation. This is now spreading even to the core. This week's CPI figures in Germany and France will be absolutely key. Japanisation is the real danger for Europe now, and the same could start to be true in the US too, unless we see an uptick in core inflation soon. The core PCE (Personal Consumption Expenditure) deflator - the Fed’s preferred inflation measure - stands at 1.2 per cent year on year.

The establishment survey part of Friday’s US employment reports certainly contained some crumbs of comfort, but I find it hard to believe the balance of views on the FOMC will be sufficiently shifted by one set of figures, or even just by the hopefully untainted report next month, to bring tapering forward to the December meeting. Optimists also latched onto last week’s first reading of Q3 GDP, at +2.8 per cent, as another positive, but the bulk of the surprise came from a large increase in inventories; always a double-edged sword-were inventories climbing because of falling demand right now, or because manufacturers foresaw increased demand in the future? Either way the likely give-back in this quarter means growth is heading for only 1.5 per cent in Q4.

Finally though, Fed politics also mitigate against December tapering. It seems pretty clear that QE is seen as yielding diminishing returns and the monetary tool du jour is now forward guidance (love it, or think it’s dangerous like me), and the Fed would like to strengthen theirs by lowering the employment threshold for rate rises from 6.5 per cent to at least 6.0 per cent, probably 5.5 per cent. This is a normal human reaction to the scare of their lives that the Fed got this summer as 10-year yields exploded from 1.6 per cent to 3.0 per cent, slowing the housing market and dragging higher the shorter term rates that the Fed would have us believe are anchored for years to come. I believe we won’t now see QE without this enhancement of forward guidance.

With a change of Chairman coming up and wholesale changes in Fed voters six weeks after the next Fed meeting, (both Regional President rotations and new Fed Governors), this strengthening of forward guidance will look very suspect if it takes place in December and is just inherited by the "new" FOMC in January. Forward guidance is, by definition, a promise; and one of a very personal nature.

Graffiti covers a fence around the construction site of the new headquarters of the European Central Bank on August 30, 2013 in Frankfurt, Germany. Photograph: Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Jeremy Corbyn challenged by Labour MPs to sack Ken Livingstone from defence review

Former mayor of London criticised at PLP meeting over comments on 7 July bombings. 

After Jeremy Corbyn's decision to give Labour MPs a free vote over air strikes in Syria, tonight's Parliamentary Labour Party (PLP) meeting was less fractious than it could have been. But one grandee was still moved to declare that the "ferocity" of the attacks on the leader made it the most "uplifting" he had attended.

Margaret Beckett, the former foreign secretary, told the meeting: "We cannot unite the party if the leader's office is determined to divide us." Several MPs said afterwards that many of those who shared Corbyn's opposition to air strikes believed he had mishandled the process by appealing to MPs over the heads of the shadow cabinet and then to members. David Winnick declared that those who favoured military action faced a "shakedown" and deselection by Momentum activists. "It is completely unacceptable. They are a party within a party," he said of the Corbyn-aligned group. The "huge applause" for Hilary Benn, who favours intervention, far outweighed that for the leader, I'm told. 

There was also loud agreement when Jack Dromey condemned Ken Livingstone for blaming Tony Blair's invasion of Iraq for the 7 July 2005 bombings. Along with Angela Smith MP, Dromey demanded that Livingstone be sacked as the co-chair of Labour's defence review. Significantly, Benn said aftewards that he agreed with every word Dromey had said. Corbyn's office has previously said that it is up to the NEC, not the leader, whether the former London mayor holds the position. In reference to 7 July, an aide repeated Corbyn's statement that he preferred to "remember the brilliant words Ken used after 7/7". 

As on previous occasions, MPs complained that the leader failed to answer the questions that were put to him. A shadow minister told me that he "dodged" one on whether he believed the UK should end air strikes against Isis in Iraq. In reference to Syria, a Corbyn aide said afterwards that "There was significant support for the leader. There was a wide debate, with people speaking on both sides of the arguments." After David Cameron's decision to call a vote on air strikes for Wednesday, leaving only a day for debate, the number of Labour MPs backing intervention is likely to fall. One shadow minister told me that as few as 40-50 may back the government, though most expect the total to be closer to the original figure of 99. 

At the end of another remarkable day in Labour's history, a Corbyn aide concluded: "It was always going to be a bumpy ride when you have a leader who was elected by a large number outside parliament but whose support in the PLP is quite limited. There are a small number who find it hard to come to terms with that result."

George Eaton is political editor of the New Statesman.