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.

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.