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.

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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