Debt levels are at record highs in many leading industrial nations, inflation and official interest rates already are very low, economic growth is weak and rigid labour markets make wage cuts unlikely -- all pre-conditions for deflation to take hold.

"The successful taming of inflation has increased the possibility that most advanced industrial economies might be one deep recession away from experiencing deflation," the influential Bank for International Settlements (BIS) said in its annual report.

While the BIS did not say any one country was at risk of following Japan into a damaging deflationary cycle -- where falling prices undermine growth by making debt more expensive to service and squelching demand -- it noted that bouts of effective deflation are far more common yesterday.

Consumer prices fell below one per cent three to four times more frequently in 2000 and 2002 in advanced countries than in the 1980s. After adjusting for measurement bias, this means that prices effectively were falling.

The BIS recommended advance planning because recent experience in Asia shows that deflation can prove insidious, creeping up undetected.

Moreover, in a slow-growth environment with activist central banks like the Federal Reserve and Swiss National Bank lowering interest rates toward zero, policymakers may find they have exhausted their traditional monetary tools at the very time deflationary forces accelerate.

"Central banks might wish to explore systematically along with fiscal and prudential authorities the set of policy options available to address deflationary forces well in advance of their actual emergence," the BIS, which acts as a forum for the world's central bankers. Indeed Abdullah Alattiya, central bank governor of the Gulf state of Qatar, told Reuters deflation was discussed among those attending the BIS annual meeting.