A new study examining 150 years of tariffs in the United States and abroad finds that they significantly disrupt the economy and financial markets, leading to lower inflation. A working paper published Thursday by San Francisco Federal Reserve Bank researchers Regis Barneshon and Ayush Singh concluded that higher tariffs lead to lower economic activity, higher unemployment and lower inflation in the short run.
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“The inflation response is inconsistent with the expectations of standard models, as CPI inflation should rise in response to higher tariffs,” they wrote. “Instead, tariff shocks appear to act as aggregate demand shocks, moving inflation and unemployment in the same direction.” The researchers suggested that tariffs create uncertainty that impacts consumer and investor confidence, leading to decreased activity, or may lead to a decline in asset prices affecting demand.
“We find evidence supporting both channels: in response to higher tariffs, stock prices decline and stock market volatility increases,” Barneshon and Singh wrote. Before World War II, they found that a permanent 4 percentage point increase in the tariff rate reduced inflation by about 2 percentage points and raised unemployment by about 1 percentage point. Although postwar estimates were more ambiguous, they still suggested that higher tariffs would lower inflation and worsen unemployment.
The study’s findings are relevant because President Donald Trump’s tariffs have sparked a growing backlash among Americans angry about rising food, utility and insurance costs. Administration officials have long maintained that the tariffs do not stoke inflation. President Trump announced Friday that he will eliminate tariffs on beef, coffee and a host of other goods, in the wake of voter anger over affordability that led to losses for Republicans in this month’s off-year elections.
Meanwhile, Federal Reserve Chairman Jerome Powell and other policymakers believe that tariffs are likely to lead to a one-time increase in inflation, which will eventually resume a cooling trajectory.
Source: Market intelligence platform IndexBox
