by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
Inflation is one of the most divisive statistics we publish because it’s inherently personal. No single number can fully capture anyone’s experience, and the debate over what should or shouldn’t be in the basket never goes away. The Fed’s emphasis on core inflation often frustrates people - households do buy food and gasoline - but monetary policy can’t solve a drought or offset an oil embargo. It operates on demand, not temporary supply disruptions.
That context makes today’s report notable. If you strip out shelter, where higher mortgage rates have effectively locked in homeowners, reduced turnover, and tightened supply, inflation is essentially back at 2%, even with the added pressure from tariffs. By this measure, outside housing, very little inflation appears “sticky”. That doesn’t diminish the seriousness of the housing affordability issue, but it does suggest that higher rates wouldn’t fix it, because the driver is supply restriction, not overheating demand.
More importantly for markets, the six‑month deceleration in core inflation sits in the top quartile historically. It bears little resemblance to the entrenched inflation of the 1970s or the deflation risk after the GFC; it looks like straightforward disinflation. When inflation is trending this way, rate cuts become more likely than not - adding another layer of support to an environment where double‑digit equity returns have been the norm.
Historically speaking, disinflation also meaningfully improves the earnings environment. As cost pressures ease, margins stabilize, planning visibility improves, earnings growth typically strengthens. That’s especially relevant this cycle, which has been “off‑cycle” from the start: manufacturing and median earnings growth contracted for nearly three years and are only now beginning to turn.
Last week’s note highlighted the improvement in new orders as an early indication that the manufacturing recovery may be durable, and disinflation adds another reinforcing signal. After inflation decelerations of this magnitude, manufacturing and industrial production have tended to reaccelerate – with Industrials stocks being key beneficiaries. But if one of the central questions for 2026 is whether durable EPS growth can take hold, today’s inflation backdrop is yet another confirming signal.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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