The financial press has spent four years obsessed with rising prices. As the Fed turns hawkish and the consensus is bracing for more of the same, the word for 2026 isn’t inflation; it’s disinflation, and most retail investors don’t quite know what it means, why it matters, or how to position for it.
Inflation forecasting models’ assumptions are diverging, but you wouldn’t notice it from the headlines. Federal Reserve commentary, Bank of Canada minutes, sell-side strategy notes, and the financial-television circuit are still organized around the assumption that inflation is sticky, energy-driven, and likely to keep central banks in a holding pattern through 2026.
We think that view is wrong, in a way that will move portfolios materially over the next twelve months.
In this piece, we define disinflation, discuss how it differs from deflation and inflation, and then pinpoint the three driving forces of disinflation in 2026, and what it means for stocks, bonds, and cash.
Inflation, Disinflation, and Deflation
Disinflation is a slowing in the rate of inflation. Prices are rising but more slowly than before. If the Consumer Price Index (CPI) falls from +4% year-over-year in one quarter to +2.5% the next quarter, that’s disinflation. This is generally considered healthy; it means the Central Bank’s tightening worked, and rate cuts can resume without rekindling price pressures. Disinflation doesn’t happen alone; it’s the product of several macroeconomic trends in 2026.
Inflation is the gas pedal for prices. Prices are rising (+2%, +4%, +7%), and the cost of goods and services rises over time.
Deflation is a price level that is falling. CPI (year-over-year) goes negative: think -0.5% and -1.0%. This is a rare and dangerous scenario that haunted Japan for two decades and is what the Fed is institutionally terrified of. Deflation is dangerous because it tends to be self-reinforcing: consumers pull back spending, waiting for lower prices, demand falls further, businesses cut wages and headcount, and the cycle compounds.
Inflation Outlook in 2006: A Contrarian Viewpoint
Due to inflation on a long-term cooling trajectory and as M2 money supply stagnates, the cost-squeeze in the U.S economy (due to higher oil prices) will eventually send prices in the opposite direction.
The 2026 backdrop is firmly disinflationary. We are not calling for outright deflation in the U.S. or Canada but for the rate of inflation to fall faster and further than the consensus expects, undershooting the Federal Reserve’s +2.0% target by the second half of the year.
That distinction matters for positioning. Disinflation is unambiguously bullish for long-duration bonds, supportive for high-quality equities, and bearish for commodity-linked cyclicals. Deflation, by contrast, is a much messier outcome that requires more defensive positioning.
What Causes Disinflation?
There are three forces that drive sustained disinflation. Right now, all three are active.
1. A Disinflationary Output Gap
This is the textbook driver. When the supply side of the economy can produce more than the demand side wants to consume, there is downward pressure on prices.
The math is straightforward. The U.S. economy’s potential supply growth – the sum of labor-force expansion and multifactor productivity – has been running at roughly +3.0% to +3.5% on an annual basis, helped meaningfully by the post-pandemic productivity surge and labor-force normalization. Real demand growth, meanwhile, has been running at +1.0% to +1.5%. The difference between potential supply and actual demand is the output gap, and it is widening.
A widening output gap is the macroeconomic equivalent of a store that ordered too much inventory: prices come down to clear the shelves.
2. Lagged Shelter Normalization
Shelter, primarily owners’ equivalent rent and rent of primary residence, accounts for roughly one-third of U.S. headline CPI and an even larger share of the core.
Shelter inflation in the official data lags real-time market rents by 12 to 18 months, because the Bureau of Labor Statistics’ methodology smooths over a long sample of existing leases rather than just spot-market new leases.
Real-time market rent indices from Zillow, Apartment List, and CoreLogic peaked in 2022 and have been decelerating sharply since. That deceleration is finally working its way through the official data. Shelter has no way to go but down in the inflation prints over the next 12 months.
3. Sticky Services Rolling Over
Core services ex. shelter – sometimes called “supercore” inflation – has been the last holdout. Wage-sensitive sectors like health care, education, and personal services kept prices elevated even as goods inflation collapsed.
But wage growth is decelerating. Average hourly earnings growth has been grinding lower, and job-finding rates are weakening. Quitting rates have normalized. The wage impulse that kept supercore inflation sticky is now reversing, and supercore prints are beginning to roll over.
How Disinflation Has Historically Affected Major Asset Classes
The historical pattern across past disinflationary cycles is reasonably consistent across stocks, bonds, commodities, and cash.
None of what follows is a recommendation; it is a description of how these asset classes tend to behave when inflation has decelerated significantly. Past performance is not a guarantee of future results.
- Long-duration bonds have historically been the most directly affected asset class. Falling inflation tends to give central banks scope to cut policy rates, which has typically translated into capital appreciation on longer-dated government bonds. The mechanical sensitivity is meaningful: a -100 basis point decline in 30-year yields has historically produced an approximately +18% to +20% price appreciation on long-dated Treasuries, in addition to the coupon. The same dynamic applies to long-dated Government of Canada bonds.
- Defensive equity sectors (Consumer Staples, Health Care, Utilities, and quality dividend payers) have historically held up relatively well during disinflationary slowdowns because their cash flows are less cyclically sensitive. Highly cyclical sectors such as Energy, Materials, and Banks have tended to lag, as falling nominal prices compress reported revenues even when real demand is stable.
- Commodities have generally underperformed during sustained disinflationary cycles. Energy, base metals, and broad commodity indexes have typically declined in nominal terms as the demand impulse weakens. Gold has often been a notable exception for structural reasons we explore in our piece on central bank gold buying.
- Cash and money-market instruments have historically seen yields fall as central banks cut policy rates. The opportunity cost of holding short-duration instruments has risen meaningfully as rate-cut cycles have progressed in past episodes.
How individual investors should respond to these historical patterns depends on their:
- Objectives
- Time horizon
- Tax situation
- Existing portfolio
Rosenberg Research does not provide individualized advice in public commentary, and readers should consult qualified financial professionals before adjusting their portfolios.
The Case Against the Hawks
The hawks reacted to a real shock: energy prices spiked after the Strait of Hormuz disruption, with tariff pass-through still working through the system. But that shock is already fading; oil has fallen roughly a third from its highs.
The hawks’ best counterargument is resilient consumer demand, with retail sales up over +7.0% year-over-year as of May. Although it’s a fair point, it misses the structural trend underneath: wage growth has cooled from its post-pandemic peak, and shelter costs – which lag real-time rents by 12 to 18 months – are still working lower in the official data. Commodity shocks tend to be one-off, not structural, and central banks have a history of overcorrecting to them. The real question for 2026 is whether Fed Chair Kevin Warsh’s hawkish tilt outlasts the shock that triggered it.
Why Many Analysts Are Slow to See Disinflation
The dominant counter-argument from the consensus is twofold.
- First, the recent oil-price spike has rekindled concerns that energy will keep headline CPI elevated. Rosenberg Research’s analysis on oil prices and inflation makes the case that supply-side oil shocks have historically been short-lived; they have not typically translated into wage-price spirals when the demand backdrop is weak, and the demand destruction from price spikes has usually done the disinflationary work that the original shock seemed to undo.
- Second, the argument that the labor market is “still tight” is, in our view, increasingly out of date. The number of unemployed workers has been moving higher, and hiring rates have normalized to below pre-pandemic levels. We believe the labor market is meaningfully softer than the prevailing narrative suggests.
The deeper reason consensus is slow to recognize cyclical inflection points is institutional. Sell-side economists tend to anchor on consensus. Central bankers tend to err on the side of caution. Both biases mean the system as a whole is often late to recognize disinflation, as it was late to recognize the 2021-2022 inflation surge in the other direction.
This is the kind of asymmetric analytical setup that defines our research process – looking at the data in front of us rather than the narrative anchored on the last cycle.
What Rosenberg Research Is Watching Right Now
The data points we’re tracking closely over the next 60 to 90 days are:
- Core services ex. shelter in both the CPI and PCE prints. The supercore deceleration is the linchpin of the disinflation thesis. Watch the three-month annualized rate in particular.
- Owners’ equivalent rent (OER) in the official data. As real-time market rents continue to flow through with a lag, OER should drag headline and core CPI lower for the balance of 2026.
- Average hourly earnings and the employment cost index. The wage impulse is the engine of services inflation. Continued deceleration here means the disinflation has staying power.
- Inflation breakevens. The 5-year breakeven is a market-based measure of inflation expectations. A meaningful break below 2.0% would confirm that the bond market is repricing the disinflation thesis.
- Federal Reserve and Bank of Canada commentary. Watch for the moment central bankers pivot from “we need to be patient,” to “we are confident inflation is on the path to +2.0%.” That pivot historically front-runs aggressive rate-cut cycles by 60 to 90 days.
For subscribers, our daily Breakfast with Dave note tracks each of these data series with charts, historical analogues, and positioning implications.
Frequently Asked Questions
What is the difference between disinflation and deflation?
Disinflation means the rate of inflation is slowing – prices are still rising, just more slowly. Disinflation is generally considered healthy and supportive of risk assets. Deflation means the price level is actually falling. Deflation is rare and dangerous, and is associated with prolonged economic stagnation. The 2026 setup in the U.S. and Canada is firmly disinflationary; we are not calling for outright deflation.
Is disinflation good for the stock market?
Historically, disinflation has been associated with constructive equity markets, particularly for high-quality defensive sectors. Falling inflation has typically given central banks scope to cut rates, which has supported equity valuations. The historical record shows defensive equities (Consumer Staples, Health Care, Utilities) holding up relatively well during disinflationary cycles, while cyclicals and commodity-linked sectors have often lagged. Long-duration bonds have historically been among the more directly affected asset classes. Past performance is not indicative of future results, and individual circumstances will determine appropriate positioning.
What causes disinflation?
Three forces typically drive sustained disinflation: a widening output gap (supply-side capacity exceeding demand), lagged adjustment in sticky components like housing, and decelerating wage growth that takes pressure off service prices. All three are active in the U.S. and Canadian economies in 2026.
How does disinflation affect interest rates?
Falling inflation gives central banks the green light to cut policy rates. Lower policy rates flow through to lower yields across the curve, with the longer end usually rallying most aggressively because long-bond yields are most sensitive to inflation expectations. This is why long-duration Treasuries are typically the highest-conviction trade in a disinflation cycle.
Is the U.S. in a disinflationary trend in 2026?
In our view, yes, notwithstanding the recent oil-price-driven uptick in headline CPI. The underlying drivers – the output gap, shelter normalization, and decelerating wage growth – point in our analysis toward inflation moving back toward and potentially below the Federal Reserve’s +2.0% target. We do not put precise dates or magnitudes on this in public commentary, but we believe the broader market is underpricing the speed and durability of the disinflationary impulse.
The Bottom Line
In our view, disinflation is the defining macro story of 2026, and the consensus remains anchored on the last cycle’s inflation surge. Recognizing where we are in the inflation cycle – rather than where we recently were – is the precondition for thoughtful portfolio construction.
If you want a daily, contrarian, data-driven read on where the inflation cycle is actually heading, browse our subscription options and see why portfolio managers, family offices, and institutional allocators across North America rely on Rosenberg Research to get ahead of the next inflection.
The Rosenberg Research Team produces daily macroeconomic research and market commentary led by founder and president David Rosenberg. Our flagship publication, “Breakfast with Dave,” has been delivering contrarian institutional-grade analysis for over fifteen years.
This article reflects the views of Rosenberg Research & Associates as of the publication date and is intended for general information and educational purposes only. It does not constitute investment, legal, tax, or accounting advice and should not be construed as a recommendation to buy or sell any specific security or to adopt any particular investment strategy. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Investors should consult with a qualified financial advisor regarding their individual circumstances before making investment decisions.
