New Fed Research Shows Tariff Hikes Act as Demand Shocks—Raising Unemployment and Lowering Inflation

Special Economic Update on Tariff Shock

Fed Researchers Conclude Tariffs Act as Demand Shocks—Raising Unemployment and Lowering Inflation—Contrary to Traditional Supply Shock Views

 Last Thursday (November 13, 2025), researchers Régis Barnichon and Aayush Singh from the Federal Reserve Bank of San Francisco published the working paper, “What Is a Tariff Shock? Insights from 150 Years of Tariff Policy.” This report challenges the standard economic view that tariff hikes increase inflation by raising production costs. Instead, Barnichon and Singh find—using 150 years of data from the US, France, and the UK—that tariff increases tend to raise unemployment and reduce inflation by lowering overall economic activity.

The timing of this publication is notable, coming less than four weeks before the upcoming December 9–10 FOMC meeting. It remains unclear how these new findings might influence FOMC members, who have traditionally viewed tariff shocks as supply shocks – expecting a one-time increase in inflation that cools off later, as Chair Powell and other policymakers have indicated in the past.

 New Findings:
Conventional models predict that higher tariffs act as cost-push shocks, making imports more expensive and driving up consumer prices. However, the authors’ empirical analysis shows the opposite: tariff shocks behave more like aggregate demand shocks, simultaneously reducing both economic activity and inflation. This pattern holds across different historical periods and countries.

The report identifies two main mechanisms behind these surprising results. First, tariff hikes create economic uncertainty, which dampens consumer and investor confidence. Second, they depress asset prices and increase market volatility, further reducing aggregate demand. These channels help explain why inflation falls rather than rises after a tariff shock.

In summary, Barnichon and Singh’s research provides robust evidence that tariff shocks do not behave as the conventional wisdom suggests. Rather than fueling inflation, they tend to slow the economy and reduce price pressures—an insight with important implications for monetary policy.

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

_______________________________________________________________________

All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.