Tariffs Lower Inflation: Impact on Employment & Economy
- A new study examining 150 years of tariff data in the U.S.
- The findings are notably relevant given the growing backlash against President Donald Trump's tariffs, with many Americans expressing frustration over rising costs for food, utilities, and insurance.
- In a working paper published on Thursday, San Francisco Fed researchers Régis Barnichon and Aayush Singh detailed their research.They found that higher tariffs lead to reduced economic...
Tariffs and Inflation: A Counterintuitive Relationship
Table of Contents
The Study’s Findings
A new study examining 150 years of tariff data in the U.S. and abroad has found that tariffs disrupt the economy and financial markets in a way that ultimately leads to lower inflation.This conclusion directly contradicts the commonly held belief that import taxes drive up prices.
The findings are notably relevant given the growing backlash against President Donald Trump’s tariffs, with many Americans expressing frustration over rising costs for food, utilities, and insurance. Though,if the study’s conclusions are accurate,President Trump may eventually be able to point to improved inflation numbers,albeit possibly at the expense of a weaker economy and labor market.
In a working paper published on Thursday, San Francisco Fed researchers Régis Barnichon and Aayush Singh detailed their research.They found that higher tariffs lead to reduced economic activity, increased unemployment, and, surprisingly, lower inflation in the short term.
“The inflation response goes against the predictions of standard models, whereby CPI inflation should go up in response to higher tariffs,” they wrote. “Rather, tariff shocks appear to act as aggregate demand shocks-moving inflation and unemployment in the same directions.”
Why Tariffs Might Lower inflation
The study proposes two primary explanations for this counterintuitive effect. First, tariffs create uncertainty that undermines consumer and investor confidence, leading to decreased economic activity and downward pressure on inflation. Second, tariffs could trigger a decline in asset prices, further dampening demand and contributing to higher unemployment and lower inflation.
“We find evidence in support of both channels: in response to higher tariffs, stock prices decline and stock market volatility increases,” Barnichon and Singh wrote.
Historical Analysis
Analyzing historical data, the researchers found that before World War II, a permanent 4-percentage-point increase in the tariff rate reduced inflation by 2 percentage points and increased unemployment by approximately 1 percentage point. After World War II, the estimates are less certain, but still suggest that tariff increases reduce inflation and worsen unemployment.
Trump Tariffs and the Inflation Debate
Administration officials have consistently maintained that Trump’s tariffs are not contributing to inflation,despite the consumer price index rising as the implementation of his trade war in April. However, on Friday, Trump announced that he is considering further tariff increases.
This study adds a new layer of complexity to the debate surrounding the economic impact of tariffs. While the immediate effect of tariffs is frequently enough perceived as higher prices for consumers, this research suggests that the broader economic consequences may actually exert downward pressure on inflation.
Data Table: Historical Impact of Tariff Increases (Pre-WWII)
| Tariff Increase | Inflation Reduction | unemployment Increase |
|---|---|---|
| 4 Percentage Points |