A new study that examined 150 years of tariffs in the U.S. and abroad found they disrupt the economy and financial markets so much that the result is lower inflation.<\/p>\n
The conclusion goes against the conventional wisdom on how import taxes affect prices and comes as President Donald Trump\u2019s tariffs have stirred a growing backlash among Americans who are angry about higher food, utility and insurance costs.<\/p>\n
But if the study\u2019s finding are correct, Trump may eventually be able to point to better inflation numbers, assuming he can stomach a weaker economy and labor market.<\/p>\n
In a working paper<\/a> published on Thursday, San Francisco Fed researchers R\u00e9gis Barnichon and Aayush Singh said higher tariffs lead to reduced economic activity, higher unemployment\u00a0and\u00a0lower inflation in the short term.<\/p>\n \u201cThe inflation response goes against the predictions of standard models, whereby CPI inflation should go up in response to higher tariffs,\u201d they wrote. \u201cInstead, tariff shocks appear to act as aggregate demand shocks\u2014moving inflation and unemployment in the same directions.\u201d<\/p>\n One possible explanation is that tariffs create uncertainty that hits consumers\u2019 and investors\u2019 confidence, depressing economic activity and putting downward pressure on inflation, according to the study. <\/p>\n Alternatively, tariffs could trigger a drop in asset prices that also weigh on demand, resulting in higher unemployment and lower inflation.<\/p>\n \u201cWe find evidence in support of both channels: in response to higher tariffs, stock prices decline and stock market volatility increases,\u201d Barnichon and Singh wrote.<\/p>\n Before World War II, they found that a permanent 4-percentage-point increase in the tariff rate reduced inflation by 2 percentage points and raised unemployment by about 1 percentage point.<\/p>\n After the war, the estimates are more uncertain but still point to tariff hikes reducing inflation and worsening unemployment, they added.<\/p>\n Trump tariffs<\/p>\n Administration officials have long maintained that Trump\u2019s tariffs aren\u2019t stoking inflation, even though the consumer price index has crept higher since he launched his trade war in April. <\/p>\n