Tariffs Cool Inflation Early but Push Prices Higher Over Time: SF Fed Study — Evening Brief – 11.26.25
A study from the Federal Reserve Bank of San Francisco finds that tariffs may have a dual—and time-dependent—effect on inflation: they tend to lower inflation in the short run but raise it in the long run as economic conditions adjust. The report analyzes more than four decades of international data to evaluate how inflation and unemployment respond to changes in trade barriers.
Authored by Naomi Halbersleben, Òscar Jordà, and Fernanda Nechio of the San Francisco Fed’s Economic Research Department, the study concludes that the immediate impact of tariff increases mirrors a negative demand shock. As tariffs take effect, higher import costs and heightened uncertainty prompt consumers and businesses to cut back spending, slowing economic activity and putting downward pressure on prices.
“This pattern suggests that, at first, the effects of tariffs more closely resemble a negative demand shock — that is, consumers and businesses pull back their spending, which slows economic activity and also slows down inflation,” the researchers wrote.
However, as the economy adapts, the forces driving inflation shift. Domestic producers begin adjusting to reduced foreign competition, supply chains reorganize at higher cost, and firms pass increased production expenses to consumers. Over time, these supply-side constraints outweigh the initial demand slowdown.
“Over time, however, economic activity picks up and inflation increases to a higher rate than would have been the case without the tariff increase,” the authors found. After adjusting for global macroeconomic conditions, exchange-rate movements, and other structural factors, the researchers concluded: “Demand factors prevail in the short run, but supply factors dominate in the long run.”
The timing of these effects carries important implications for the Federal Reserve. Monetary policy typically acts with a lag, and the study notes that policymakers need to consider both phases of tariff-driven dynamics when determining the appropriate stance of policy.
“It is important to understand the timing of the different effects of trade policy on the economy to craft the appropriate monetary policy response, more so since monetary policy tends to act on the economy with some delay,” the authors wrote.
Still, the researchers urge caution. The tariffs implemented by the U.S. in recent years—particularly those associated with geopolitical tensions and supply-chain reshoring—are larger and more uncertain than most historical precedents. As a result, applying past international patterns to today’s environment is imperfect at best.
“Extrapolating our results to the current environment is somewhat fraught,” they warned, noting that historical data may underestimate the inflationary or growth effects of today’s elevated and politically contentious tariff levels.
The findings underscore a pivotal challenge for central bankers: navigating a trade-policy landscape in which tariffs may distance inflation from traditional business-cycle dynamics and complicate the timing of interest-rate decisions.