Deflation Threat Worries G-20 Roiled by Emerging Markets

Posted by Bloomberg

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Janet Yellen and Mario Draghihave 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.