Breaking down inflation’s limits: Insights from Denise Chisholm - June 25, 2026
Inflation remains a central focus for investors, but its path may be more constrained than it first appears. Prices are still elevated. Beneath the surface, however, the forces driving inflation look different this time. Fidelity’s Director of Quantitative Market Strategy, Denise Chisholm, highlights a key shift. Employment is holding steady, but purchasing power is falling. That dynamic is reshaping the cycle and influencing how consumers spend, how companies respond and how investors think about what comes next.
Here are some of the key points from her commentary.
Inflation without strong demand
Inflation is often described as too much money chasing too few goods. In the current environment, that condition is not fully in place. Real incomes have declined. Consumers are still earning, but their ability to spend has weakened. That creates a natural limit. Even when prices rise, households are not in a position to continue absorbing increases indefinitely. This helps explain why inflation may struggle to build momentum. It does not remove the issue entirely. Higher costs are still being felt, especially in areas like energy and housing. But without stronger income growth, the backdrop does not support a sustained re-acceleration.
A different inflation cycle
This cycle looks different from past inflationary periods. Historically, rising wages often kept pace with prices, reinforcing inflation through a feedback loop. That dynamic has not played out here. Employment has held up, but wages have not kept up with rising costs. Purchasing power has declined across a broad base of consumers. The result is a more restrained environment. Spending is adjusting rather than collapsing. At the same time, the absence of a wage-driven cycle reduces the likelihood that inflation becomes entrenched. It also helps explain why sentiment has been weak, even with stable job conditions.
Pricing power is uneven
Inflation is not affecting all sectors equally. Pricing power varies, and that variation is already shaping outcomes. Technology has shown a greater ability to maintain pricing. Demand remains relatively resilient in certain areas. Consumer-focused businesses, on the other hand, are facing more resistance. When prices rise too far, consumers tend to adjust. They may switch brands, reduce purchases or delay spending. In some cases, companies have reversed earlier price increases after seeing demand weaken. At a broader level, spending remains constrained. If households spend more in one area, they tend to spend less elsewhere. That balancing effect helps limit broader inflation pressures.
Supply pressures and market signals
Supply dynamics are still playing a role, though not always in a lasting way. Energy markets are one example. Prices have reacted to supply disruptions, yet underlying capacity suggests supply may be sufficient over time. This could place pressure on prices following periods of volatility. Housing is more complex. Higher mortgage rates have reduced market turnover, making it harder to assess real-time pricing. This affects how inflation is measured, particularly in shelter-related data. These dynamics also highlight a challenge for policymakers. Some components of inflation are driven by supply conditions and are less responsive to interest rate changes. As a result, the overall inflation picture is not always straightforward.
Signs of an earlier cycle
Despite continued uncertainty, the broader market cycle may still be in an earlier phase than many assume. Median earnings have only recently recovered to prior peaks. Historically, this type of recovery has often been followed by several years of expansion. At the same time, signs of excess remain limited. While certain areas of the market have performed strongly, broad-based euphoria is difficult to identify. Outside a few pockets, the environment appears relatively measured. That matters. Cycles often end when imbalances build to unsustainable levels. Today, those excesses appear more contained, which may suggest a longer runway.
Denise’s sector views
From a sector perspective, several areas stand out based on current conditions.
- Technology continues to lead, supported by strong earnings and durable trends, though volatility remains
- Industrials are showing opportunities, particularly in areas linked to housing activity
- Materials, including segments like steel, are benefiting from improving free cash flow dynamics
- Housing-related segments within industrials and consumer discretionary may also present opportunities as conditions evolve
Conclusion: Signals beneath the surface
The current environment is defined by trade-offs. Inflation remains elevated, but weaker real income growth is limiting its ability to accelerate. At the same time, uneven pricing power and supply-driven pressures are creating a more fragmented landscape. Risks remain, particularly around inflation and policy. Yet the absence of strong demand and broad excess suggests a cycle that could prove more durable than expected. It is not a simple backdrop. But with careful interpretation, it offers a more balanced view of where markets may be heading.
