Visual perception involves the grouping of individual elements into coherent patterns that reduce the descriptive complexity of a visual scene. The physiological basis of this perceptual simplification remains poorly understood. We used functional MRI to measure activity in a higher object processing area, the lateral occipital complex, and in primary visual cortex in response to visual elements that were either grouped into objects or randomly arranged. We observed significant activity increases in the lateral occipital complex and concurrent reductions of activity in primary visual cortex when elements formed coherent shapes, suggesting that activity in early visual areas is reduced as a result of grouping processes performed in higher areas. These findings are consistent with predictive coding models of vision that postulate that inferences of high-level areas are subtracted from incoming sensory information in lower areas through cortical feedback.