A new study that examined 150 years of tariffs in the United States and abroad found that they disrupt the economy and financial markets so much that the result is deflation. A working paper published Thursday by San Francisco Federal Reserve researchers Regis Barnishon and Ayush Singh concluded that higher tariffs would lead to lower economic activity, higher unemployment and lower inflation in the short term.
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“The inflation response is contrary to the predictions of standard models, whereby CPI inflation should rise in response to higher tariffs,” they wrote. Instead, tariff shocks appear to act like aggregate demand shocks—moving inflation and unemployment in the same direction. The researchers suggested that tariffs would create uncertainty that would hit consumer and investor confidence, reduce activity, or could cause asset prices to fall, which would affect demand.
“We find evidence in support of both channels: In response to higher tariffs, stock prices fall and stock market volatility increases,” Barnishon and Singh wrote. Before World War II, they found that a permanent 4 percent increase in the tariff rate reduced inflation by 2 percent and raised unemployment by about 1 percent. Postwar estimates, though more uncertain, still point to rising tariffs that would reduce inflation and worsen unemployment.
The study’s findings are relevant because President Donald Trump’s tariffs have sparked a growing backlash among Americans who are angry about the higher costs of food, utilities and insurance. Government officials have long believed that tariffs do not increase inflation. On Friday, President Trump announced he would lift tariffs on beef, coffee and a range of other goods following voter anger over affordability that cost Republicans losses in this month’s off-year elections.
Meanwhile, Federal Reserve Chairman Jerome Powell and other policymakers believe the tariffs are likely to boost inflation once, which will eventually resume its cooling course.
Source: IndexBox Market Intelligence Platform
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