Tariff Shocks May Raise Jobless Rate While Easing Inflation, SF Fed Research Finds — Evening Brief – 01.06.26 

A new San Francisco Fed Economic Letter argues that the sharp 15% jump in the average U.S. tariff rate in 2025—the largest in the modern era—may ultimately put upward pressure on unemployment while lowering inflation, challenging conventional wisdom about trade barriers and prices. Drawing on pre-World War II episodes when tariff changes were similarly large and abrupt, the authors find that past hikes tended to slow economic activity and push jobless rates higher, even as inflation moved down.  

Because large tariff moves have been rare in recent decades, the research leans on historical periods such as the late 19th century and the interwar years, when tariff rates sometimes swung by as much as 20 percentage points in a single year. The study uses a “narrative” approach to isolate tariff changes driven by politics and shifting policy priorities—rather than by the business cycle—and then tracks how inflation and unemployment responded over time.  

The authors estimate that a 1 percentage point increase in tariffs is associated with roughly a 0.6 percentage point decline in inflation, with the disinflationary effect and the rise in unemployment both lasting for up to two years before fading. That pattern runs counter to standard models that treat tariffs mainly as cost-push shocks that raise firms’ input costs and consumer prices, at least in the short run.  

Instead, the Letter points to uncertainty and weaker wealth as key channels. Large, sudden tariff hikes tend to unsettle businesses and households, lifting financial-market volatility and weighing on asset prices, which in turn curb spending and investment. That demand-side hit helps explain why past tariff shocks looked more like adverse aggregate demand shocks—higher unemployment paired with lower inflation—than pure supply squeezes.  

Still, the authors caution against drawing a straight line from history to today. With global supply chains now more deeply integrated and imported inputs playing a larger role in production, modern tariff shocks could generate stronger cost pressures than in earlier eras, potentially changing the balance between their disinflationary and inflationary effects.