The 1980 movie "Caddyshack" includes a memorable scene in which a swimming pool, teeming with swimmers, is hurriedly evacuated and drained. Swimmers had spotted a floating brown object, misidentified it, and reacted by panicking.
"I want the entire pool scrubbed, sterilized, and disinfected," a character orders, as a laborer clad in a hazmat suit and gas mask swabs the floor of the pool.
The floating brown object turned out to be a chocolate bar. "It's no big deal," the pool man declares before casually eating a bite.
The pool panic looks like a perfect parable for the current moment in the financial markets and monetary policy, full of groupthink and negativity and unnecessary overreaction. Wall Street awaits the Bureau of Labor Statistics' April 12, 8:30 a.m. monthly release of the Consumer Price Index. The Federal Reserve Open Market Committee's next meeting is scheduled for May 2 and May 3. The Fed chairman, Jerome Powell, raising interest rates to fight inflation that is already waning, increasingly looks like an official ordering an empty swimming pool fumigated to combat a no-big-deal threat.
A lot of the inflation story is shelter, which makes up about a third of the consumer price index and 40 percent of the "core" CPI that leaves out food and energy. Shelter comes in two pieces: rents and owner-occupied housing.
The public radio program Marketplace notes, "recent data has shown that rent inflation has been slowing down." And USA Today reports that a boom in apartment construction is adding supply, taking some of the price pressure off renters: "the cost to rent an apartment nationwide may be moderating."
As for owner-occupied housing, nationally, the Case-Schiller index of home prices has been trending down, but the CPI is still showing increases for "owners' equivalent rent," as economist Alan Reynolds has observed. Reynolds calls it a "statistical illusion."
It's not often that I agree with Nobel laureate economist Paul Krugman, but when it happens, it's worth noticing. Krugman wrote this week, "almost every measure of inflationary pressure I'm aware of has improved substantially over the past year, with no increase in the unemployment rate. And there's no hint at all of the much-feared self-reinforcing inflationary spiral, in which rising expectations of future inflation feed into current inflation."
Krugman went on, "it will be a real tragedy if exaggerated fear of inflation causes the Federal Reserve to push interest rates too high for too long, leading to a gratuitous recession that throws away many of the gains we've made."
Sure, there are regional variations in both prices and unemployment. And sure, too, some people worry about replays of "the 1970s, when inflation retreated several times only to come roaring back."
The worriers could be right. But they could also be like the people mistaking a candy bar for something yuckier. Once the crowd figures out it's really no big deal, there's no good reason not to jump back in the water.
Stock indexes have been creeping upward. Perhaps it is because some of the bloom is off the volatility-laundering of private equity, and investors are looking for assets with more liquidity and pricing transparency (or accuracy). Perhaps, too, it is because when the inflation of the 1970s was finally conquered and Reagan's pro-growth tax cuts kicked in, a memorable and long-lasting market rally ensued. It could happen again, soon. As Larry Summers's teacher Rudiger Dornbusch used to say, things take a much longer time coming then you think, and then they happen much faster than you would have thought.
That is true in the stock market and also accurately describes shifts in the political consensus that enables institutions such as the Federal Reserve. The Fed seems to be consistently lagging behind the curve, whether it comes to inflation-fighting rate increases or recession-combating rate cuts or even regulating and examining Silicon Valley Bank. It looks as silly as someone overreacting to a chocolate bar floating in a swimming pool. With luck, we'll be able to look back later and laugh.