Are Tariffs Really Cooling Down Inflation? What the White House Isn’t Telling You

Series on Tariffs

The White House recently cited a Federal Reserve Bank of San Francisco working paper as evidence that tariffs don’t cause inflation.

The claim is technically accurate but “forgets” to include critical context about how this effect actually works. The paper is actually much more damaging to the Trump administration’s trade policy agenda than they may realize. Let’s jump into the paper and the data!

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What the Fed Paper Actually Found

The paper “What Is a Tariff Shock? Insights from 150 Years of Tariff Policy” by Régis Barnichon and Aayush Singh analyzed 150 years of U.S. tariff data (1870-2020), plus additional data from France and the UK during the first wave of globalization (1850-1913).

The researchers found that when tariffs increased, inflation decreased in the short run rather than increased as standard economic models predict. However, this happened because tariffs acted as “negative demand shocks”, they raised unemployment and contracted economic activity.

Source: Paper

The mechanism: tariffs lowered inflation by damaging the economy, not by improving it.

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Scale Matters: Large vs. Marginal Changes

This paper looks at large tariff changes, not marginal adjustments. The researchers studied episodes where tariff rates jumped 5, 10, or even 20 percentage points in a single year.

Historical examples:

• McKinley Tariff (1890): raised average tariffs to nearly 50%

• Smoot-Hawley Act (1930): pushed tariffs to 59%, the highest in U.S. peacetime history

• First wave of globalization (1870-1913): rates occasionally rose or fell by 10-20 percentage points annually

Source: Paper

The paper notes: “Between the end of World War II and 2025, yearly tariff changes were very modest, orders of magnitude smaller than the 15 percent increase in average U.S. tariffs in 2025”.

For small, marginal tariff adjustments (0.5-1 percentage point), the standard economic relationship likely holds: modest price increases with minimal economic disruption. But large tariff increases trigger different dynamics. They create significant economic uncertainty that depresses confidence and spending, producing negative demand shocks.

The 2025 tariff increase is “unprecedented in the modern era”. To find comparable increases, you must look back to the historical periods this paper studies. The 2025 tariffs are not marginal adjustments, they’re large-scale policy shifts where the historical patterns documented in this research apply directly.

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The Empirical Results

Pre-World War II (1869-1939):

• A 4 percentage point tariff increase lowered inflation by 2 percentage points on impact

• The same increase raised unemployment by approximately 1 percentage point

Post-World War II (1946-2020):

• Estimates are less certain due to much smaller tariff variations, but the pattern holds: higher tariffs led to lower inflation and higher unemployment

Source: Paper

International Evidence: Analysis of France and UK data (1850-1913) produced consistent results: tariff increases lowered inflation and contracted economic activity

The researchers used two identification strategies:

1. Narrative identification: isolating tariff changes explicitly motivated by long-run considerations rather than business cycle conditions

2. OLS estimation: exploiting the quasi-random nature of tariff changes due to opposing partisan views on tariff policy

Both methods produced similar results, strengthening confidence in the findings.

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How Large Tariff Increases Work

The paper provides evidence for two transmission mechanisms. First, tariff shocks create economic uncertainty that depresses consumer and business confidence, reducing spending and investment. Second, tariffs trigger declines in asset prices, which reduce wealth and further dampen aggregate demand.

The researchers found that in response to higher tariffs, stock prices declined and stock market volatility increased, supporting both proposed channels.

This explains why large tariff increases act as aggregate demand shocks rather than the cost-push shocks predicted by standard models. The uncertainty effects dominate the direct price effects when changes are large enough.

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Policy Implications

The Federal Reserve must understand whether tariffs are inflationary (requiring tighter monetary policy) or deflationary through demand destruction (requiring looser monetary policy). The paper’s findings suggest large tariff increases fall in the latter category.

For policymakers considering tariff policy, the trade-offs are clear:

• Large tariff increases may reduce inflation

• But they achieve this by raising unemployment and contracting GDP

• The effect operates through increased economic uncertainty and lower consumer confidence

This is not a favorable policy trade-off. It replaces one economic problem (inflation) with others (unemployment, slower growth, increased uncertainty). One could argue that perhaps achieving the policy objective the Trump admin is trying to produce would outweigh the negative impacts, but it really is not clear what that policy objective is for this administration.

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The Selective Citation Problem

The White House cited this paper to argue tariffs don’t cause inflation while omitting that:

1. The paper studies large tariff changes comparable to 2025 levels

2. These changes raise unemployment

3. They lower economic activity and GDP growth

4. They reduce stock prices and increase market volatility

All of these findings appear in the same paper being cited as evidence that tariffs are benign for inflation.

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Coming Up Next: Testing the Theory with Real-Time Data

The Fed paper shows that historically, tariffs acted as negative demand shocks, reducing consumer and business spending, which then lowered both inflation and economic activity. But are we seeing this pattern play out with the 2025 tariffs?

In the next post, we’ll examine real-time data on aggregate demand to answer this question. Specifically, we’ll track:

• Consumer Confidence Indices: The University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index, which measure how households view current and future economic conditions

• Personal Consumption Expenditures: Monthly data on actual consumer spending across goods and services categories

If the historical pattern holds, we should see declining consumer confidence and reduced spending growth following the tariff implementation. If we don’t see these effects, it would suggest something different is happening this time, perhaps due to changes in the structure of the modern economy, different monetary policy responses, or other factors.

We’ll also compare the magnitude of any observed effects to what the historical relationship would predict, helping us understand whether 2025 is following the script or writing a new chapter.

Stay tuned for the data.

Sources:

• Barnichon, Régis and Aayush Singh. 2025. “What Is a Tariff Shock? Insights from 150 years of Tariff Policy.” Federal Reserve Bank of San Francisco Working Paper 2025-26. https://www.frbsf.org/wp-content/uploads/wp2025-26.pdf