A recent study has challenged what we thought we knew about tariffs and their impact on inflation. Researchers from the San Francisco Fed analyzed 150 years of tariff data and found that higher tariffs can actually lead to lower inflation and increased unemployment in the short term. This goes against the usual view that import taxes raise prices.
The study’s authors, Régis Barnichon and Aayush Singh, explained that higher tariffs create uncertainty. This uncertainty dampens consumer confidence and reduces spending, which can lower inflation. They noted, “Tariff shocks appear to act as aggregate demand shocks—moving inflation and unemployment in the same directions.”
In the past, before World War II, a significant tariff increase (like a 4-percentage-point rise) resulted in a 2-percentage-point decrease in inflation and a 1-percentage-point rise in unemployment. Although the effects became murkier post-war, they still indicated a similar trend.
These findings come at a time when tariffs imposed by the Trump administration have sparked frustration among many Americans. While the consumer price index has risen since the tariffs were introduced, the administration insists these taxes aren’t the culprits. Recently, Trump announced he would lift tariffs on certain commodities, like beef and coffee, in response to voter dissatisfaction linked to rising prices.
Federal Reserve Chairman Jerome Powell suggested that while tariffs might create a short-term inflation spike, overall inflation would likely settle back down. Yet, the economy has shown resilience despite fears of recession, with GDP rebounding and consumer spending increasing, largely driven by wealthier Americans.
However, job growth has cooled down, with only 22,000 new jobs added in September. This slowdown, along with stricter immigration policies, has created a tight job market where hiring is sluggish.
Economist Paul Donovan pointed out that the public is deeply concerned about affordability. Simply slowing inflation may not be enough to satisfy voters, who desire to see actual price reductions. Donovan noted, “Affordability is subtly different [from a cost of living crisis], and may linger.”
In today’s world, folks are taking to social media to express their frustrations with rising costs, sharing stories of how these economic shifts affect their daily lives. As we move forward, understanding how tariffs really influence our economy will be crucial for making informed decisions.
For more insights, you can check out the study here and Donovan’s perspective on the topic here.
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Employment,Inflation,Tariffs and trade,unemployment
