‘This isn’t a straight line’: White House economic adviser brushes off concern over January inflation data, says economy's dynamics look solid. Here's why he thinks ‘the trend is our friend’

Inflation surprises

Two key inflation figures for January — the Consumer Price Index and Producer Price Index — came in higher than Wall Street expectations, proving disappointing for investors who want the Federal Reserve to cut interest rates sooner rather than later.

U.S. retail and food services sales also dropped 0.8% in January 2024, breaking a two-month streak of increases. Some analysts blame this on a cold snap keeping shoppers at home, according to a CNN report, while others think Americans are feeling the squeeze of high interest rates, inflation and a harder time accessing credit.

Bernstein warned against dwelling on January’s numbers when assessing the true state of the U.S. economy.

“Some things have come in hotter than expected; some things have come in cooler than expected… Every month is going to have some anomalous features,” he said. “This isn’t a straight line. One month or another can bounce one way or the other, and that’s one of the reasons why we don’t overemphasize any particular month, whichever way it goes.”

He said that when it comes to inflation, "the trend is your friend and sometimes your friend can annoy you, but they’re still your friend.”

On a less annoying note for the U.S. economy, Bernstein pointed out that disinflation is “moving in the right direction,” supply chains (domestic and international) are improving and “goods inflation, including the CPI, [has] been flat or negative.” There has also been an epic stock market rally to kick off 2024.

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Stock market response

Before the worse-than-expected January inflation data was published, the U.S. stock market had enjoyed a five-week winning streak.

When asked about the market's response, Bernstein quoted Bloomberg’s Joe Weisenthal: “They say the stock market is not the economy, but it’s not not the economy. I think in this case, the market isn’t necessarily telling you much about the economy’s fundamentals, the market is telling you what other market participants think." He added, "I wouldn’t take a strong economic signal from that at all."

Many of the headlines surrounding the stock market rally have revolved around the rapid growth of the so-called Magnificent Seven companies: Apple (APPL), Meta (META), Google (GOOG), Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT) and Tesla (TSLA). Analysts have commented on the narrow breadth of the rally this month with a handful of companies driving gains for the benchmark index.

Instead of fixating on the giants — some of which are perhaps overvalued, with price-to-earnings (P/E) ratios well above the market average — Bernstein said people should look at the equally-weighted S&P 500 because “you can see positive movements there as well.” The S&P 500 Equal Weight index, which has the same constituents as the S&P 500 but every company is given the same weight, is up over 1% so far this year, whereas the S&P 500 index is up 5%.

He said the healthy stock market is connected to the nation’s economic recovery, strong investment into infrastructure, semiconductors and clean energy, and the fact that the U.S. economy is outperforming other advanced economies.

“Capital is very footloose these days, it could go anywhere, and much of it is choosing to be here.”