display: contents has this note

As only the box tree is affected, any semantics based on the document tree, such as selector-matching and event handling, are not affected.

This is kinda obvious: if display: contents can be set to an element via selector-matching, it shouldn't affect selector-matching. And event handling is entirely a DOM thingie.

CSS Cascade says inheritance follows the document tree but that's a blatant lie, e.g. ::first-line intercepts inheritance for some properties, and it is based on the box tree. Therefore, I don't think it's obvious at all that children elements of a display: contents still inherit from it.

So please note style inheritance is not affected by display: contents neither.