The Tariff Paradox Sf Fed Study Reveals Tariffs Initially Suppress

San Francisco, CA – November 24, 2025 – A groundbreaking series of studies from the Federal Reserve Bank of San Francisco (FRBSF) has unveiled a counterintuitive and complex relationship between tariffs and inflation, challenging... The research indicates that while tariffs can initially lead to a decrease in inflation, primarily by dampening aggregate demand, this effect is temporary, eventually giving way to a significant inflationary boost. This nuanced finding presents a formidable challenge for the Federal Reserve (FRBSF) in calibrating its monetary policy, requiring a delicate balance between addressing short-term disinflationary pressures and anticipating longer-term inflationary surges. The implications for the global financial markets and the broader economy are profound. As central banks worldwide grapple with persistent inflation and the potential for increased protectionist trade policies, the FRBSB's findings underscore the need for a more sophisticated understanding of how trade barriers propagate through the... The study suggests that policymakers must exercise extreme caution, as misinterpreting the temporal effects of tariffs could lead to inappropriate monetary responses, potentially exacerbating economic instability.

The core of the FRBSF's revelation stems from a working paper by Régis Barnichon and Aayush Singh, titled "What Is a Tariff Shock? Insights from 150 years of Tariff Policy." Their extensive historical analysis demonstrates that, immediately following the imposition of tariffs, economies tend to experience lower inflation, coupled with reduced economic activity and increased unemployment. This initial disinflationary phase is attributed to tariffs acting as an "aggregate demand shock" through two main channels: However, the studies meticulously detail a subsequent reversal. The initial disinflationary effect is transient, with inflation eventually surging. One FRBSF Economic Letter suggests that a 1% increase in tariffs leads to an initial decline of approximately 10 basis points in inflation, which then reverses to an increase of about 10 basis points...

This long-run inflationary impact aligns with traditional economic theory, where tariffs increase the cost of imported goods and production inputs, ultimately passing through to higher consumer prices as supply-side factors begin to dominate. The key players in this analysis are the FRBSF researchers, with the Federal Reserve (US: FED) standing as the primary stakeholder whose policy decisions are directly impacted. The dual impact of tariffs outlined by the FRBSF study creates a complex landscape for public companies (US: PUBCO). In the short term, the demand-dampening effects could hurt a wide array of businesses, particularly those reliant on consumer spending and investment. Companies heavily involved in international trade, such as multinational manufacturers and retailers, could face reduced sales volumes and increased inventory challenges as demand shrinks. 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.

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) NextFin news, Federal Reserve economists Regis Barnichon and Aayush Singh published a groundbreaking working paper on November 14, 2025, revealing that tariffs historically lower inflation by undermining aggregate demand rather than increasing consumer price... This comprehensive study spans 150 years of tariff data across the United States and international economies, underscoring the complex macroeconomic impacts of trade tariffs. The research, conducted under the auspices of the San Francisco Fed, analyzed tariff shocks and found they consistently reduced economic activity and heightened unemployment in the short run, effects which together suppress inflationary pressure. Contrary to conventional wisdom that tariffs act as cost-push factors that elevate consumer prices, this study positions tariffs as demand shocks that move inflation and unemployment in tandem.

The study's authors argue that tariffs create uncertainty, negatively affecting consumer and investor confidence, and can trigger declines in asset prices—factors which contribute to reduced demand nationwide. Empirical findings include a pre-World War II case where a permanent 4-percentage-point tariff increase lowered inflation by approximately 2 percentage points while increasing unemployment by 1 percentage point. Though post-war data is less precise, it still indicates tariff hikes harm labor markets and curb inflation. This revelation holds immediate policy relevance in the context of the current U.S. administration under President Donald Trump, who reinstated and expanded tariffs in prior years. Despite political criticism emphasizing tariffs' inflationary role—especially as tariffs fueled public dissatisfaction over rising food and energy costs—the Administration had consistently maintained tariffs did not stoke overall inflation.

Recently, responding to electoral backlash and affordability concerns, President Trump announced the removal of tariffs on select commodities, including beef and coffee. Meanwhile, Federal Reserve Chairman Jerome Powell has maintained a cautiously divergent stance, expecting tariffs to impart a one-time inflationary uptick but projecting inflation to moderate thereafter. The Fed study offers crucial empirical backing that tariff-induced inflationary effects are more subdued and intricately linked to suppressed demand rather than straightforward price increases. Tariffs may shape inflation far differently than standard economic models predict, according to a new working paper from two San Francisco Fed researchers. Their findings suggest the impact of trade barriers is more complex than previously understood. The study, which analyzed 150 years of tariffs, conducted by Régis Barnichon and Aayush Singh, suggests that tariffs can lead to reduced economic activity, higher unemployment, and lower inflation in the short term.

This contradicts the predictions of standard economic models, which suggest that tariff increases should lead to higher Consumer Price Index (CPI) inflation. The researchers proposed two potential explanations for this phenomenon. Firstly, tariffs may create uncertainty, affecting consumer and investor confidence, thereby depressing economic activity and reducing inflation. Secondly, tariffs could cause a drop in asset prices, further impacting demand, and leading to higher unemployment and muted inflation. "Instead, tariff shocks appear to act as aggregate demand shocks—moving inflation and unemployment in the same directions,” they wrote. The study found that before World War II, a permanent 4-point increase in tariff rates lowered inflation by 2 percentage points and increased unemployment by roughly 1 point.

While post-war estimates are less precise, the results still suggest that higher tariffs tend to push inflation down and unemployment up. An official website of the United States Government Official websites use .govA .gov website belongs to an official government organization in the United States. Secure .gov websites use HTTPSA lock (LockLocked padlock icon) or https:// means you've safely connected to the .gov website. Share sensitive information only on official, secure websites. The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

Review of Monetary Policy Strategy, Tools, and Communications Anticipation of incoming president Trump’s tariffs has caused confusion regarding high prices and high inflation. They are not really the same. The effect of tariffs is to push prices up, but not to sustain higher inflation. The nearby chart shows an economy with five percent inflation for a few years, followed by ten percent inflation. Note that higher inflation shows as a steeper slope, year after year.

The second chart, however, shows the effect of high tariffs with an underlying steady inflation rate. The higher tariffs push prices up once, but the tariffs don’t change the inflation rate in later years. When tariffs push prices up, it will feel like inflation to consumers. The key difference is that for tariffs to push inflation to a higher sustained rate (shown on the chart as a steeper line), tariffs would have to increase year after year after year. Price changes that result from tariffs typically occur all at once. Inflation, however, reflects stimulus to the economy in excess of the growth of productive capacity.

Monetarist economists assert that if production capacity grows by two percent per year, but the money supply grows by seven percent a year, the result will be five percent inflation. (They would acknowledge other factors that could change the relationship, but the basic idea remains.) Other economists argue that government’s deficit spending can be inflationary, but the two ideas can be combined: When stimulus...

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