What is disinflation, and will we see it in 2026?

Since inflation appears to have peaked in June 2022 in the wake of the COVID-19 pandemic, the economy has been on a broadly disinflationary path. In simple terms, disinflation means inflation is slowing down; prices are still rising, but at a slower pace than before.

2026 has been different, however, with the conflict in the Middle East contributing to upward pressure on oil prices – along with concerns about accelerating inflation, which remains above the Federal Reserve’s (Fed) 2% target. The general expectation is that these current energy price shocks may be temporary, further evidenced by oil prices falling after news of a short-term ceasefire framework while they negotiate a broader deal. So while inflation has been top of mind for many investors in recent months, we could return to the previous disinflationary trend.

Indeed, Treasury Secretary Scott Bessent said in a May interview with CNBC that he thinks we will see disinflation this year. Referencing new Fed Chair Kevin Warsh, Bessent said, “I actually think he’s going to be in a very good position, because we may get a series of one or two more hot inflation numbers, but then I think we’re going to see substantial disinflation.”

So how is disinflation measured? And could we see it in 2026? Read on for more.

Disinflation vs. deflation vs. ‘lower prices’

Inflation is the general rise in prices over time. When the annual inflation rate is running at 4.2% (like it was in May 2026), that’s the weighted price index of goods and services, which is an average (not all items rose 4.2% in price).

Disinflation is what happens when that rate starts falling – for example, from 4.2% to 3.5% to 2.4%. Prices are still going up, just more slowly. Contrast that with deflation, which is when inflation actually falls below zero on a year-over-year basis. A -1% annual inflation rate means that prices are lower this year than they were last year.

This distinction matters for a few reasons. Disinflation is generally viewed as a healthy development when it reflects a return toward a stable target after a period of elevated prices. Comparatively, deflation can trigger a damaging cycle: Consumers might expect prices to fall further, and they may delay purchases, which can then weaken demand and reinforce an economic contraction (or recession). While the Fed sometimes tightens financial conditions to slow demand, doing so too aggressively carries the risk of tipping into outright deflation.

For consumers, the difference is easy to lose track of. When inflation decelerates from 4.2% to 2.4%, for example, prices are still rising, just much less quickly. This doesn’t always feel like relief, which is part of why the gap between data and lived experience can be so frustrating.

In everyday terms, here’s an example of what inflation, disinflation and deflation might look like:

How disinflation is measured and what data to watch

When it comes to the inflation conversation, two major factors come into play: the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index. Both metrics track price changes across a broad basket of goods and services, but they’re constructed differently and tell slightly different stories.

Of the two, CPI is the measure you’ll often see cited in news headlines. It measures what consumers pay for a fixed basket of goods, including transportation, shelter and groceries. Within the CPI report, the headline figure captures all items within the fixed basket, including food and energy, while core CPI omits these two categories. Core CPI is often considered a useful signal of underlying inflation trends because energy and food prices can be highly volatile and can overshadow what’s happening with broader price pressures.

The Fed targets a 2% inflation rate as measured by PCE, which is the central bank’s preferred inflation metric. PCE tends to run slightly lower than CPI and is often considered more comprehensive because it adjusts for changes in consumer behavior as relative prices shift. For example, if beef gets more expensive and consumers switch to chicken, PCE picks up on that substitution while CPI does not.

One more distinction worth understanding is year-over-year (YOY) versus month-over-month (MOM) readings. YOY figures compare today’s prices to the same month one year ago and are the standard basis for the inflation rate. Base effects are important to keep in mind when considering YOY numbers. Consider the current energy price shock: With oil and gas prices higher lately, next year’s CPI will be compared against a higher base, which may mechanically pull down the YOY inflation rate even if prices remain elevated.

Even so, seasonally adjusted MOM readings can reveal changes in momentum well before they show up in the annual figures. (Unadjusted monthly changes can be heavily influenced by predictable seasonal patterns.) A string of lower monthly numbers can signal that a disinflationary trend is building even if the headline YOY number still looks elevated. In fact, analysts often triangulate economic trends using seasonally adjusted core series and annualized three- and six-month rates, rather than relying on a single MOM or YOY print.

What typically drives disinflation?

On the supply side, one of the more significant disinflationary forces is stabilization after a period of disruption. When supply chains snapped back after pandemic-era shortages, for example, prices for goods began pulling back from their peaks.

Cooling demand is another driver of disinflation. When consumers and businesses pull back on spending – whether because borrowing gets more expensive or economic uncertainty rises – the pressure on prices eases. That’s partly how interest rate increases work: When the Fed hikes rates, borrowing often gets more expensive – credit cards and variable-rate loans can reset higher, and rates on new auto loans and new fixed-rate mortgages often rise too. Higher borrowing costs can slow demand and, over time, help bring inflation down.

Productivity gains can be disinflationary by reducing unit costs (especially unit labor costs). If firms become more efficient through technology, automation or better supply management, cost growth can slow and ease pricing pressure. However, the disinflationary pass-through to prices depends on competitive dynamics and demand, since some gains may be absorbed in wages or margins.

At the same time, some parts of the economy can remain “sticky,” meaning inflation takes longer to cool. Services and shelter often tend to be stickier categories, for example. Unlike goods prices, which can fall quickly when supply chains heal, service-sector prices tend to reflect wages and local costs that adjust more slowly. Data on rent and housing-related costs tend to lag because these costs adjust gradually over time – so even if market rents begin slowing, official inflation measures may take months to fully reflect those changes.

Energy prices can have a notable effect on headline readings. A sharp drop in oil and gas prices can pull headline inflation down significantly even when core inflation stays elevated. This is why analysts tend to omit volatile energy prices when assessing the underlying inflation trend.

Will we see disinflation in 2026?

Conditions are mixed, so there’s no telling if we will see disinflation in 2026. Headline CPI ticked up to 4.2% in May on top of energy-driven pressures tied to the conflict in Iran. The Producer Price Index (PPI) has also risen. At the same time, forecasters and officials are debating whether these supply shocks are transient or likely to continue.

Energy prices tied to the Iran conflict have been a major contributor to inflation in 2026. A resolution of the conflict, and a subsequent reopening of the Strait of Hormuz, could lead to an easing in pricing pressures. If this were to occur alongside other developments – including the continued gradual decline in services and shelter inflation, as well as moderation of wage growth – then disinflation could be in the very near future.

On the flip side, several factors could prevent disinflation from occurring. Sticky services inflation could keep core readings elevated for longer than projected. Further supply shocks in energy markets, whether from geopolitical escalation or production shortfalls, could keep inflation numbers up. Strong consumer demand and continued business pricing power could also prevent inflationary pressure from easing as quickly as hoped.

With these factors in mind, investors can turn to the following data sources for insight into the disinflation conversation:

What disinflation could mean for investors

Different parts of a portfolio can respond to disinflation in different ways.

For bonds, a sustained disinflationary trend can be good news. As inflation pressures cool, yields may come under less upward pressure, which can help bond prices. That said, the timing and pace of any rate moves from the Fed tend to be more immediate drivers of fixed-income performance.

If inflation cools without a sharp slowdown, markets may price a lower path for interest rates and bond yields, reducing discount rates and potentially supporting long-duration growth stocks – provided earnings expectations remain intact. If disinflation comes with weaker growth and softer earnings, investors often prefer more defensive, steady sectors. In practice, markets react to the mix of growth, Fed policy expectations, earnings and valuations – not sector labels alone.

For cash and short-term instruments, the picture gets more nuanced. High-yield money market accounts and short-duration bonds have typically offered higher returns in a high-rate environment. If disinflation leads to rate cuts, though, there’s reinvestment risk to consider: The rates available when current holdings mature may be lower than today’s.

That said, inflation and interest rate cycles can be difficult to predict consistently. Instead of chasing short-term market moves, maintaining diversification and a long-term perspective can help investors navigate changing economic conditions.

The bottom line

Disinflation means price growth is slowing. So, while prices continue to move higher, they are doing so at a more moderate pace. The distinction between disinflation and deflation matters and can influence household budgets, Fed policy and the way financial markets respond to new data.

Whether sustained disinflation emerges in 2026 may depend in part on the stabilization of energy prices due to a resolution of geopolitical pressures. Beyond that, wage growth, housing-related costs and the strength of consumer demand may further shape any future disinflationary trend. For investors, knowing how disinflation differs from deflation and persistent inflation can provide useful context for understanding economic news and interest rate decisions.

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