London and Washington - Central banks in developed markets have a new reason to consider the “ogre” of deflation: eroding confidence in emerging markets.

Weaker growth from Brazil to South Africa risked unleashing a “disinflationary impulse through the global economy”, Bruce Kasman, the chief economist at JPMorgan Chase in New York, said. Cheaper commodities, slower trade and sliding exchange rates in developing markets could soften price pressures internationally.

That could force US Federal Reserve chairwoman Janet Yellen and European Central Bank (ECB) president Mario Draghi to keep monetary policy loose for longer.

“Emerging market volatility is likely to continue,” Roberto Perli, a former Fed economist and now a partner at Cornerstone Macro in Washington, said. Over time that “could lead to easier monetary policies than large central banks would have otherwise preferred, mainly through potential disinflationary effects”.

Perli said that would support assets in the developed world, whose outperformance is shown by the MSCI World index’s 17 percent gain over the last year. Its emerging market equivalent is down 10 percent.

The dynamics of the world economy will be debated this week when central bankers and finance ministers from the Group of 20 (G20) gather in Sydney. For the first time since the G20 became the premier forum for economic policy discussion in September 2009, it is officials from developing nations who are on the defensive as growth fades and markets tumble.

In contrast, the US and Europe will be at the forefront in powering a pick-up in global growth this year.

International Monetary Fund chief Christine Lagarde said rich nations could not be complacent. “We see rising risks of deflation, which could prove disastrous for the recovery,” she said in a speech in Washington on January 15. “Deflation is the ogre that must be fought decisively.”

So far, central bankers do not sound concerned. Yellen told legislators last Tuesday that some of the recent softness in prices “reflects factors that seem likely to prove transitory”. Draghi said five days earlier that while “there is certainly going to be a subdued inflation”, deflation was not a risk.

Strategists at Barclays have a different view of the euro zone, where inflation of 0.7 percent is already less than half the ECB’s target. Kasman’s team at JPMorgan estimates inflation in advanced nations will end the year at 1.7 percent, less than the 2 percent rate many central bankers regard as price stability.

On top of the concern about falling prices is a slowdown in emerging markets. Declining demand from countries including South Africa, Brazil and India will put downward pressure on commodity prices, potentially imparting another disinflationary wave. – Bloomberg