Tariffs function as a tax on consumers, an established fact where the charges imposed on companies are largely passed on to buyers. Throughout 2025, voter frustration over the cost of living intensified, leading to off-year election victories for Democrats like New York City’s new Mayor Zohran Mamdani. This prompted an irate President Trump to dismiss affordability concerns as a “hoax” when raised by Democrats, asserting he has already defeated inflation since taking office.
However, what if tariffs could reduce inflation?
The common “cost-push” theory suggests tariffs increase domestic production costs by raising the price of imported materials. This leads to reduced economic activity and higher inflation in the near term. A new analysis from the San Francisco Federal Reserve, detailed in an economic letter, challenges the long-held economic agreement that tariffs increase inflation. It argues the opposite outcome is possible: higher tariffs could result in lower inflation alongside higher unemployment.
“Our analysis of historical data highlights a possibility that the large tariff increase of 2025 could put upward pressure on unemployment while putting downward pressure on inflation,” authors Regis Barnichon and Aayush Singh stated in the report.
Conventional analysis has painted a gloomy picture for the economy after President Donald Trump raised the average U.S. tariff rate by 15% last year, up from under 3% at the close of 2024—a level not seen since 1935. If correct, the San Francisco Fed’s report provides a sliver of optimism that a tariff shock might not fuel inflation to the extent some economists predict.
Uncertainty as a shock to demand
The core of the argument is that tariff shocks generate economic uncertainty, which acts as a deflationary force. The report indicates the common view that tariffs increase inflation overlooks the economic consequences of this uncertainty.
“A tariff shock tends to coincide with an uncertain economic environment, which by itself depresses economic activity by lowering consumers’ and investors’ confidence and puts downward pressure on inflation,” the authors wrote.
The article presents a secondary explanation, noting a tariff shock might trigger a fall in asset prices, reducing overall demand. This would elevate unemployment and lower inflation.
History points to a deflationary effect
Barnichon and Singh examined data from 1870 to 1913 and the interwar period between WWI and WWII, the most recent instances of comparable tariff fluctuations.
Their data showed “a strong negative correlation” between tariff changes and inflation. The analysis indicates a one percentage point rise in tariffs correlated with a 0.6 percentage point drop in inflation.
Different era, different economy
As the authors acknowledge, the U.S. economy has changed dramatically since the early 1900s. “The share of imported inputs in production is higher today than in the past, which means a tariff shock may be more likely to raise inflation,” they noted.
Import volume in 2024, prior to Trump’s tariffs, was approximately $3.2 trillion. For context, in 1929—the year before the Smoot-Hawley Tariff Act raised tariffs to around 20%—import volume was significantly lower.
“Because many aspects of the economy were different a hundred or more years ago, those historical experiences may not fully apply to current conditions,” Barnichon and Singh said. Notably, the last time tariffs of this scale were imposed was during the Great Depression, when unemployment reached a peak of 25% and GDP contracted by almost 30%.