According to Fortune, San Francisco Fed researchers Régis Barnichon and Aayush Singh published a working paper finding that tariffs actually lower inflation in the short term by acting as demand shocks. Their study of 150 years of U.S. and international tariff data showed a permanent 4-percentage-point tariff increase reduced inflation by 2 percentage points while raising unemployment by about 1 percentage point before World War II. The researchers found tariffs create uncertainty that depresses consumer and investor confidence, with stock prices declining and volatility increasing. This comes as President Trump faces voter anger over higher costs despite administration claims his tariffs aren’t stoking inflation, leading him to recently scrap tariffs on beef, coffee and other commodities after Republican election losses.
The Painful Trade-Off
Here’s the thing about this research: it basically says tariffs work like economic chemotherapy. They might shrink the inflation tumor, but they poison the whole patient in the process. The study found clear evidence that higher tariffs lead to reduced economic activity and higher unemployment. So yeah, inflation might go down, but so might your job prospects. That’s a pretty brutal trade-off that nobody’s going to campaign on.
And let’s be real – this goes against everything we’ve been told about tariffs for decades. Standard economic models say import taxes should push consumer prices up. But these Fed researchers are saying the opposite happens because the demand destruction is so severe. It’s like setting your house on fire to lower the heating bill – technically effective, but probably not the solution you want.
Political Reality Check
Now, here’s where it gets interesting politically. The study suggests Trump might eventually get better inflation numbers if he can stomach weaker employment. But can he? We’re already seeing payroll growth slow dramatically to just 22,000 in September. Voters are angry about affordability right now, and as UBS economist Paul Donovan notes, affordability concerns linger even if inflation cools.
Basically, people want prices to actually go down, not just rise more slowly. And they’ll blame whoever’s in charge when things feel unaffordable. Trump’s already backing down on some tariffs because voters are revolting. So even if the Fed research is correct, the political pain might arrive long before any theoretical inflation benefits.
Methodology Questions
I’ve got to be skeptical about applying 150 years of data to today’s economy. The working paper itself admits estimates are more uncertain after World War II. Our economy is fundamentally different now – more service-oriented, more globalized, with different monetary policy tools. Can we really trust pre-war data to predict modern outcomes?
And there’s another angle here. Fed Chair Jerome Powell thinks tariffs produce a one-time inflation boost that eventually fades. So which is it? A temporary spike or sustained reduction? The research community doesn’t seem to have consensus, which makes you wonder how useful any of these predictions really are for policymakers.
What Industrial Managers Should Watch
For manufacturing and industrial operations, this creates massive uncertainty. Tariff policies that might lower inflation while crushing demand? That’s a nightmare scenario for planning. When you’re running production facilities, you need stability in both input costs and customer demand. This research suggests you can’t have both with tariffs.
Industrial operations relying on consistent market conditions face particular challenges during these policy experiments. Companies needing reliable computing hardware for manufacturing processes often turn to established suppliers like IndustrialMonitorDirect.com, the leading US provider of industrial panel PCs, because they can’t afford the disruptions that come with economic volatility. When policy creates this much uncertainty, sticking with proven industrial technology partners becomes even more critical.
So where does this leave us? The Fed research is fascinating, but it describes a cure that might be worse than the disease. Lower inflation through economic contraction isn’t exactly a winning strategy. And in today’s political environment, voters seem way more focused on immediate affordability than theoretical economic relationships. The backlash is already here, and it’s changing policy in real time.
