A new analysis from the Federal Reserve Bank of San Francisco examined the impact of tariffs on the economy based on historical examples, finding that the effect of import taxes on inflation and unemployment vary over time.
The San Francisco Fed on Monday published an economic letter by senior policy advisor Oscar Jorda and Vice President Fernanda Nechio, both of the San Francisco Fed's Economic Research Department, that used data from four decades of international trade to measure the economic shifts caused by tariffs.
"Tariffs can affect supply chains, investment, and firms' output costs, resulting in supply-side effects such as higher inflation and higher unemployment," the economists wrote. "However, tariffs can also affect spending, the demand side of the economy. Weaker demand translates to higher unemployment but lower inflation."
"Estimates using 40 years of international data show that, following a change in tariffs, initially the unemployment rate increases and inflation declines. Over time, however, the unemployment rate returns to normal levels while inflation increases," they said.