Tariffs Have Surprising Effect On Unemployment And Inflation Patterns

Economist Steve Moore joins ‘Varney & Co.’ to unpack President Donald Trump’s proposed tariff checks and warns the White House against fueling inflation. A new analysis from the Federal Reserve Bank of San Francisco examined the impact of tariffs on the economy based on historical examples, finding that the effect of import taxes on inflation and unemployment... The San Francisco Fed on Monday published an economic letter by senior policy advisor Oscar Jorda and Vice President Fernanda Nechio, both of the San Francisco Fed's Economic Research Department, that used data from... "Tariffs can affect supply chains, investment, and firms' output costs, resulting in supply-side effects such as higher inflation and higher unemployment," the economists wrote. "However, tariffs can also affect spending, the demand side of the economy. Weaker demand translates to higher unemployment but lower inflation."

Tariffs are taxes on imported goods that are paid by the importer, who typically passes some or all of those higher costs on to consumers through higher prices. (Qian Weizhong/VCG via Getty Images) FRBSF Economic Letter 2025-29 | November 24, 2025 The United States announced new, higher tariff rates this year. Tariffs can affect supply chains, investment, and firms’ input costs, resulting in supply-side effects such as higher inflation and higher unemployment. However, tariffs can also affect spending, the demand side of the economy.

Weaker demand translates to higher unemployment but lower inflation. Estimates using 40 years of international data show that, following a change in tariffs, initially the unemployment rate increases and inflation declines. Over time, however, the unemployment rate returns to normal levels while inflation increases. The United States has pursued a wide range of import tariffs against its trading partners since the beginning of the year. Considerable uncertainty remains about their implementation and overall impact on the economy. How tariffs end up impacting the economy will depend on how households, businesses, and trade partners respond going forward.

Assessing the varied effects of tariffs and their evolution over time is complicated. In this Economic Letter we rely on an empirical analysis of historical data for a group of advanced economies. We estimate the effects of changes in tariff rates on domestic unemployment and inflation rates by relying on the average historical experience observed across these countries when tariffs were modified. Our results depend on how well we can isolate the effect of tariffs from other explanatory factors. Moreover, because the new U.S. tariff rates far exceed what we observe historically, we interpret the evidence with caution.

Our results suggest that, immediately following an increase in tariff rates, the unemployment rate tends to increase, and inflation tends to fall. This pattern suggests that, at first, the effects of tariffs more closely resemble a negative demand shock—that is, consumers and businesses pull back their spending, which slows economic activity and also slows down inflation. Over time, however, economic activity picks up and inflation increases to a higher rate than would have been the case without the tariff increase. A new study that examined 150 years of tariffs in the U.S. and abroad found they disrupt the economy and financial markets so much that the result is lower inflation. The conclusion goes against the conventional wisdom on how import taxes affect prices and comes as President Donald Trump’s tariffs have stirred a growing backlash among Americans who are angry about higher food, utility...

But if the study’s finding are correct, Trump may eventually be able to point to better inflation numbers, assuming he can stomach a weaker economy and labor market. In a working paper published on Thursday, San Francisco Fed researchers Régis Barnichon and Aayush Singh said higher tariffs lead to reduced economic activity, higher unemployment and 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. “Instead, tariff shocks appear to act as aggregate demand shocks—moving inflation and unemployment in the same directions.” A new analysis from the Federal Reserve Bank of San Francisco examined the impact of tariffs on the economy based on historical examples, finding that the effect of import taxes on inflation and unemployment... The San Francisco Fed on Monday published an economic letter by senior policy advisor Oscar Jorda and Vice President Fernanda Nechio that used data from four decades of international trade.

"Tariffs can affect supply chains, investment, and firms output costs, resulting in supply-side effects such as higher inflation and higher unemployment," the economists wrote. "However, tariffs can also affect spending, the demand side of the economy. Weaker demand translates to higher unemployment but lower inflation." "Estimates using 40 years of international data show that, following a change in tariffs, initially the unemployment rate increases and inflation declines. Over time, however, the unemployment rate returns to normal levels while inflation increases," they said. The economists noted that the immediate effect resembles a negative demand shock.

"Firms may withhold investment spending until there is more clarity on future trade policy, since tariff policies will prompt them to reconsider how they arrange their supply chains. Consumers may respond cautiously to the new environment by slowing down their demand for products and services," the researchers said. "Over time, the economy adjusts: The unemployment rate returns to its original level or even declines slightly, whereas inflation picks up and peaks three years after the initial change in tariffs, relative to the... Could everything we thought we knew about tariffs be wrong? A shocking new study suggests tariffs might actually lower inflation, a finding that turns conventional economic wisdom on its head! But here's the catch: this benefit comes at the cost of higher unemployment.

This groundbreaking research, fresh from a regional Federal Reserve Bank, throws a wrench into decades of economic theory. The study meticulously analyzed 150 years of tariff policies, not just in the U.S., but across numerous nations. The core conclusion? Tariffs, contrary to popular belief, tend to decrease inflation while simultaneously increasing unemployment. This directly challenges the widely held notion that tariffs act as a kind of consumer tax, driving up prices for everyday goods. This research couldn’t be more timely.

Think about it: President Trump's administration aggressively pursued tariff renegotiations with almost every country, including major trading partners like Canada and Mexico, aiming to rebalance international trade. And the U.S. Supreme Court is currently grappling with the very constitutionality of these tariffs. Many economists initially predicted that these tariffs would push the U.S. economy into a recession. But now, many are rethinking their positions.

If tariffs aren't inflationary, as this study suggests, are we on the verge of rewriting the fundamental textbooks of economics? The San Francisco Federal Reserve Bank researchers released a compelling working paper (link provided in original) that significantly enriches the national conversation surrounding tariffs. Previous research tended to focus on the impact of tariffs on specific industries, offering insights into how much of the price increase resulting from tariffs is ultimately passed on to consumers. While valuable, these studies lacked the broader perspective needed to understand the overall macroeconomic effects of tariff changes. This new study, however, delivers comprehensive, economy-wide data highlighting both the advantages and disadvantages of tariffs. The study's core findings are nothing short of remarkable:

A 25% tariff on Chinese goods sounds like a simple policy. However, when that tax hits the U.S. economy, it triggers a complex chain reaction. Tariffs have moved from obscure trade policy to front-page news, sparking fierce debates about American jobs, national security, and the cost of living. Proponents argue they’re essential tools for protecting American workers and leveling the global playing field. Critics warn they’re economic weapons that backfire, raising prices and inviting retaliation.

Recent U.S. tariff actions have created a wealth of real-world data, allowing economists and government agencies to measure actual impacts rather than rely on theoretical models. The results reveal winners and losers, intended benefits and unintended consequences. A tariff is a tax imposed on goods crossing America’s borders. When foreign products arrive at U.S. ports, U.S.

Customs and Border Protection assesses and collects this tax based on the product’s type, value, and origin. The legal responsibility for payment falls on the U.S. company importing the goods, which must settle the bill within 10 days. This is crucial to understand: American companies, not foreign governments, write the checks to the U.S. Treasury. WASHINGTON (AP) — Federal Reserve officials agreed earlier this month to hold off on any interest-rate moves while they evaluated the impact of President Donald Trump’s tariffs on inflation, unemployment, and the broader economy.

According to minutes from their May 6-7 meeting, released Wednesday, “almost all” of the 19 officials that participate in the Fed’s meetings on policy saw a risk that “inflation could prove to be more... Their decision flew in the face of Trump’s repeated calls to reduce borrowing costs because, in his view, there is “NO INFLATION.” The central bank, led by Chair Jerome Powell, cut its key rate... Federal Reserve staff economists said during the meeting that inflation “remained elevated,” the minutes showed. Trump’s tariffs have created a dilemma for the Fed because the duties could both raise inflation — which the Fed would typically fight with higher interest rates — and slow the economy and push... Officials “judged that downside risks to employment and ... upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases,” the minutes said.

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