SAN FRANCISCO—New research from the Federal Reserve suggests that sharp increases in tariffs may be associated with lower inflation, challenging a long-standing assumption that higher trade barriers inevitably push prices higher.
In a research note published Monday by the Federal Reserve Bank of San Francisco, economists Regis Barnichon and Aayush Singh examined historical episodes of elevated tariffs and their effects on inflation and unemployment.
“The 15% increase in the average U.S. tariff rate in 2025 was the largest in the modern era,” the researchers wrote. “Assessing the likely impacts of such a large and sudden change, or tariff shock, on unemployment and inflation is crucial for monetary policy discussions.”
According to the analysis, the last time U.S. tariff rates exceeded 15% was during the period between World War I and World War II, limiting the number of historical comparisons available to policymakers.
Challenging Conventional Theory
Analysts have noted that conventional economic theory holds that higher tariffs raise domestic production costs by increasing the price of imported inputs and finished goods, which in turn lifts consumer prices while slowing economic activity. Under that framework, tariffs would be expected to push inflation higher even as growth weakens.
The San Francisco Fed research, however, points to a different outcome. Based on their estimates, Barnichon and Singh found that higher tariffs have historically been associated with rising unemployment and lower inflation.
The researchers said one possible explanation is uncertainty. A sudden tariff increase often coincides with broader economic uncertainty, which can weigh on consumer and business confidence, reduce spending and investment, and place downward pressure on prices.
‘Adverse Tariff Shock’
Another possibility is that an “adverse tariff shock” reduces asset prices, dampening demand and contributing to lower inflation while unemployment rises, the paper said.
The authors cautioned that historical relationships may not fully apply to the current economy.
