Lead
A San Francisco Fed working paper released this week examines 150 years of tariff episodes in the United States and abroad and concludes that higher tariffs tend to reduce inflation by depressing economic activity and raising unemployment. The study, authored by Régis Barnichon and Aayush Singh, finds that tariff shocks act more like aggregate demand contractions than conventional supply-driven price pressures. That conclusion runs counter to standard expectations that import taxes push consumer prices up, and it has immediate relevance amid the recent U.S. tariff actions and political debate over affordability.
Key Takeaways
- Researchers at the San Francisco Fed analyzed 150 years of tariff episodes across countries and time, identifying consistent links between tariff hikes, weaker activity, and lower inflation.
- In the pre–World War II sample, a permanent 4 percentage-point rise in tariff rates is estimated to cut inflation by about 2 percentage points and raise unemployment by roughly 1 percentage point.
- The authors find evidence that tariff increases are followed by stock price declines and higher stock-market volatility, consistent with asset-price channels that reduce demand.
- Post–World War II estimates are less precise but generally point in the same direction: tariff hikes coincide with lower inflation and worse labor-market outcomes.
- The paper interprets these patterns as tariff-induced uncertainty and demand shocks rather than straightforward passthrough of import costs to consumer prices.
- Policy context: the findings complicate the policy narrative around recent U.S. tariffs, which have been linked publicly to higher consumer costs even as the study suggests tariffs can indirectly cool inflation.
Background
Tariffs have long been a tool of trade policy and a flashpoint in domestic politics. Economists traditionally treat import taxes as a direct input-price shock that should raise consumer price indexes, at least temporarily, as import costs pass through to retail prices. Over the past decade political leaders in several countries have reintroduced or raised tariffs, increasing interest among researchers about their macroeconomic effects.
The San Francisco Fed paper situates its analysis in that contested literature by assembling a long-run dataset of tariff changes and macroeconomic outcomes. The authors compare episodes before and after World War II, noting institutional shifts in global trade, financial markets, and policy frameworks that could alter tariff effects. Key stakeholders include central banks focused on inflation, governments weighing political benefits of protection, businesses exposed to input-cost and demand shocks, and households facing affordability pressures.
Main Event
The working paper, published this week, reports that tariff increases are followed by declines in output and employment and by falls in headline inflation. Using historical tariff episodes, the authors trace how tariff announcements and implementations correlate with short-run macroeconomic movements. They emphasize that the dominant empirical pattern is one in which inflation and unemployment move in the same direction—down for inflation and up for unemployment—after tariff shocks.
Two channels are highlighted. First, tariff-driven uncertainty can dent consumer and investor confidence, restraining spending and investment and reducing aggregate demand. Second, tariff episodes frequently coincide with drops in asset prices; falling equity valuations and heightened volatility can further depress demand by reducing wealth and tightening financial conditions. The paper documents both patterns in the data.
The researchers quantify the prewar effect: a permanent 4-percentage-point tariff increase yields an estimated 2-percentage-point decline in inflation and a roughly 1-percentage-point rise in unemployment. For the postwar era the estimates are less precise but still suggest similar directional impacts. The authors caution about statistical uncertainty and the role of contemporaneous shocks that can complicate identification.
Analysis & Implications
If tariffs operate primarily as demand-dampening shocks, the policy implications differ from conventional expectations. Central banks that focus on headline inflation might observe a temporary improvement in inflation readings after tariff hikes, but that improvement could coincide with weaker labor markets and slower growth—outcomes most voters find unacceptable. Political leaders tempted to cite better inflation statistics must weigh those gains against employment and activity losses.
Financial-market channels amplify the tradeoffs. The paper shows that equity prices fall and volatility rises following tariff increases, which tightens financial conditions and magnifies the contraction in spending and investment. That mechanism suggests tariffs can transmit through both confidence and balance-sheet effects, not merely through direct price passthrough of import costs.
For the post-World War II world—characterized by deeper financial markets, larger cross-border supply chains, and different policy responses—the authors find weaker statistical precision but similar directions. That uncertainty matters for policymakers: if the magnitude of effects is smaller or more variable today, the historical evidence offers guidance but not mechanical predictions for current episodes.
Comparison & Data
| Period | Tariff rise (permanent) | Inflation change | Unemployment change | Notes |
|---|---|---|---|---|
| Pre–World War II | +4 percentage points | −2 percentage points | +1 percentage point | Relatively precise estimates in long-run samples |
| Post–World War II | +4 percentage points | Negative, magnitude uncertain | Worse unemployment, magnitude uncertain | Estimates noisier; direction broadly similar |
The table summarizes the paper’s headline quantitative findings: the clearest evidence appears in earlier historical periods, while modern-era estimates retain directional consistency but with larger confidence intervals. That pattern reflects changes in trade integration, monetary regimes, and data quality across eras.
Reactions & Quotes
Federal Reserve officials and market participants have offered different takes. Powell and other policymakers have suggested tariffs could produce a one-off rise in prices but not a sustained inflationary trend; the working paper challenges that view by documenting demand-side offsets.
“Tariff shocks appear to act as aggregate demand shocks—moving inflation and unemployment in the same directions.”
Régis Barnichon & Aayush Singh, San Francisco Fed working paper
The political response is mixed: administration spokespeople have argued tariffs are not the primary driver of higher consumer prices, while some voters cite tariff-driven cost increases in food and other goods as a source of anger.
“People are angry about the loss of affordability, and are inclined to blame incumbent governments for this.”
Paul Donovan, UBS Global Wealth Management (comment cited in reporting)
“Tariffs may give a one-time bump to inflation, but longer-run dynamics depend on demand and policy responses.”
Federal Reserve public remarks (summary)
Unconfirmed
- Whether recent U.S. tariff actions will generate the same magnitude of inflation decline observed in prewar episodes is not established; modern institutional differences may change effects.
- Exact causal weights of the two channels—uncertainty versus asset-price declines—are not fully pinned down and remain an area for further study.
- Whether short-term reductions in headline inflation would translate into improved consumer affordability in real terms is unclear and depends on wage dynamics and distributional effects.
Bottom Line
The San Francisco Fed analysis presents a provocative and well-documented counterpoint to the simple passthrough story: tariffs can, under many historical circumstances, act as demand-dampening shocks that lower inflation while worsening unemployment and growth. For policymakers this implies a painful tradeoff—improved inflation readings could coincide with a weaker labor market and slower activity, outcomes that may prove politically costly.
For voters and businesses, the central takeaway is that tariff policy affects more than import prices; it reshapes expectations, asset markets, and demand. Policymakers weighing tariffs should therefore consider these broader macroeconomic channels and the possibility that any short-term inflation benefits may come at the price of weaker employment and affordability for many households.
Sources
- Fortune — media report summarizing the San Francisco Fed working paper and policy context.
- Federal Reserve Bank of San Francisco — Economic Research (working papers) — official research repository for the cited authors and paper.
- Bureau of Labor Statistics (BLS) — official employment and payroll releases, used for recent payroll figures (employment data).
- Bureau of Economic Analysis (BEA) — official GDP and national accounts data referenced for growth context.
- Federal Reserve — official remarks and communications from the Fed Chair and policymakers.