Tariffs are a tax on you, the consumer. That’s the undisputed fact about how tariffs function, with the levies falling on companies, which then typically pass a great percentage on to the final shopper. Voter anger about affordability built throughout 2025, culminating in offyear elections that swept Democrats such as New York City’s new Mayor Zohran Mamdani into office, prompting an angry President Trump to complain that affordability is a “hoax” when Democrats talk about it, as he’s vanquished inflation since coming into office.
But what if tariffs actually cut inflation instead?
The widely-held “cost-push” theory posits that tariffs drive up domestic production costs by making imported input more expensive. That entails a drop in economic activity and higher inflation in the short run. A new analysis from the San Francisco Federal Reserve Bank, an economic letter titled “What Can History Tell Us About Tariff Shocks?” contradicts the longstanding economic consensus that tariffs raise inflation. In fact, it claims the opposite will result: higher tariffs will lead to lower inflation (and 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 said in the report.
Prevailing wisdom has offered a pessimistic outlook on the state of the economy following President Donald Trump’s 15% increase in the average U.S. tariff rate last year, up from a rate of less than 3% at the end of 2024, a rate not matched since 1935, according to Yale Budget Lab. If accurate, the San Francisco Fed’s report offers a glimmer of hope that a tariff shock may not in fact increase inflation as much as some economists fear.
Uncertainty as a shock to demand
The crux of the argument is that tariff shocks inspire economic uncertainty, a deflationary mechanism. The report finds that the prevailing belief that tariffs raise inflation fails to take into account the economic impact of 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 outlines a second explanation, explaining that a tariff shock could ignite a drop in asset prices, depressing overall demand, which increases unemployment and decreases inflation.
History points to a deflationary effect
Barnichon and Singh analyzed data between 1870 and 1913 as well as from the interwar period between WWI and WWII, the most recent examples of tariff volatility of this magnitude.
What their data revealed was “a strong negative correlation” between changes in tariffs and inflation. According to the data, a one percentage point increase in tariffs was associated with a 0.6 percentage point decline in inflation.
Different era, different economy
But the U.S. economy has evolved significantly since the early 20th century, as the authors note. “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,” the authors note.
Import volume in 2024, before Trump enacted his tariffs, totaled about $3.2 trillion. For comparison, in 1929, the year before the Smoot-Hawley Tariff Act was enacted, raising tariffs to about 20%, import volume stood at $4.4 billion.
“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. For one, the last time tariffs of this magnitude were implemented was during the Great Depression, when unemployment reached a peak of 25% and GDP fell by nearly 30%.
