The research note from the Federal Reserve Bank of San Francisco, published Monday (Jan. 5), pointed out that past instances of steep tariff rates led to lower inflation, while examining possible causes for this phenomenon.
“The 15% increase in the average U.S. tariff rate in 2025 was the largest in the modern era,” researchers Regis Barnichon and Aayush Singh wrote. “Assessing the likely impacts of such a large and sudden change, or tariff shock, on unemployment and inflation is crucial for monetary policy discussions.”
The research found that the last time tariffs were above 15% was the period between the first and second World Wars.
The researchers note a prominent theory which argues that the shock of tariffs increases domestic production costs due to more expensive imports, while also raising the price of products that are made abroad. This leads to depressed economic activity and higher inflation.
But the researchers say their estimates indicate the opposite, with higher tariffs leading to greater unemployment and lower inflation.
“A possible explanation relies on the effects 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,” they wrote.
It could also be possible that an “adverse tariff shock” leads to reduced asset prices, which then dampens demand and lowers inflation while driving unemployment, wrote Singh and Barnichon. However, they cautioned that historical data might not apply to 2026’s economy.
Writing about the impact of tariffs last month, PYMNTS noted that the situation had forced product leaders at middle market companies “into defensive mode.” These companies are making high-stakes choices with reduced time and visibility, thanks to the combination of tariffs and delayed economic data.
Research by PYMNTS Intelligence found that nearly half of product leaders at goods-producing companies reported that tariffs are already hurting their business’ finances, underlining how quickly trade policy has shifted from an abstract risk to an operational problem. These companies are also operating an information vacuum.
“The federal government’s decision to cancel the advance estimate of third-quarter GDP, combined with a delayed retail sales report that ultimately showed slowing consumer spending, has left firms without reliable signals about demand or economic momentum,” PYMNTS wrote.
