Janet Yellen and Mario Draghi have a new reason to consider what International Monetary Fund chief Christine Lagarde calls the “ogre” of deflation: Eroding confidence in emerging markets.

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

That in turn could force Federal Reserve Chair Yellen and European Central Bank President Draghi to keep monetary policy loose for longer, increasing the attractiveness of their financial assets even at the threat of creating asset bubbles.

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

Perli says that would be supportive of assets in the developed world, whose outperformance is shown by the MSCI World Index’s 17 percent gain of 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 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 U.S. and Europe will be at the forefront in powering a pickup in global growth this year, to 3.7 percent from 3 percent in 2013, according to the IMF.

Managing Director Lagarde said rich nations can’t be complacent. “We see rising risks of deflation, which could prove disastrous for the recovery,” she said in a speech in Washington on Jan. 15. “Deflation is the ogre that must be fought decisively.”

Central bankers so far don’t sound concerned. Yellen told lawmakers on Feb. 11 that some of the recent softness in prices “reflects factors that seem likely to prove transitory” and the trading volatility sparked by emerging markets doesn’t pose a “substantial risk to the U.S. economic outlook.”

Draghi said Feb. 6 that while “there’s certainly going to be a subdued inflation,” deflation is not a risk. Europe is strengthening and price declines outside of food and energy are mainly limited to the so-called peripheral economies, which need to adjust to become more competitive, he said.

Strategists at Barclays Plc have a different view of the euro area, where inflation of 0.7 percent is already less than half the ECB’s target. They calculate the currency union is the most vulnerable to region-wide deflation since the final quarter of 2009, when the world economy was just starting to recover from the deepest recession since the Great Depression.

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. Sluggish demand has hurt the ability of companies to raise prices, while high unemployment makes it difficult for workers to win higher wages.

Kimberly-Clark Corp., the Dallas-based maker of Huggies diapers and Kleenex tissues, said on Jan. 24 that net selling prices in North America for its personal care group fell 2 percent in the fourth quarter from a year earlier. “We wanted to be a bit more competitive on the shelf every day,” Chief Executive Officer Thomas Falk said on a conference call.

Compounding the concern about falling prices is the slowdown of emerging markets, which account for about 40 percent of global gross domestic product. India, South Africa and Brazil were among those to raise interest rates last month as investors dumped their currencies.

More tightening of policy is likely. Bank of America Corp. predicts South Africa, Brazil, South Korea, Hungary and Malaysia will all boost benchmark rates by the end of this year.

Declining demand from such countries will put downward pressure on commodity prices, potentially imparting another disinflationary wave worldwide. Although the Standard & Poor’s GSCI Spot Index is little changed this year, Michala Marcussen, global head of economics at Societe Generale SA, said the larger sway emerging markets have over global GDP means any slackening now could “have a much greater impact” on prices.(Bloomberg)