Why Tarifflation Never Lived Up the Panic
Economists are finally coming to grips with the reality that President Trump’s tariff policies did not have the inflationary effects they predicted.
But the reason why may be even more challenging to the widespread assumption that tariffs cause the economy to become less efficient.
Research published by the Federal Reserve Bank of Boston on Wednesday finds that productivity growth accelerated in industries most heavily affected by tariffs—and that this largely offset the higher costs firms in those industries faced.
“Industries in which tariffs induced higher costs in 2025 also experienced greater labor productivity growth, which helped them mitigate those higher costs,” the researchers explain.
The paper assumes that firms pass through higher production costs to their customers, which is not really a safe assumption. Companies facing higher costs for components, materials, or finished products often accept narrower margins to preserve market share. Few businesses can safely assume that every additional dollar of cost can simply be added to the price paid by customers.
Yet even with full pass-through firmly embedded in the model, the Boston Fed researchers found that tariffs had a much smaller inflationary effect than might be expected because companies improved productivity to mitigate the higher costs.
Productivity increased in 37 of the 63 industries studied. Across the economy, the researchers calculate that productivity growth reduced production costs by 1.3 percent and wound up subtracting 0.9 percentage point from core personal consumption expenditure inflation.
The tariffs themselves raised domestic production costs by an estimated 1.1 percent, according to the researchers. After including the effects of tariffs on both directly imported goods and domestically produced goods, the researchers calculate that tariffs added 1.4 percentage points to core PCE inflation. Productivity erased 0.9 point of that, leaving a net contribution of just 0.5 point.
“Productivity gains thus strongly offset the increase in consumer prices induced by tariffs,” the researchers find.
That is a very different story from the warnings that tariffs would reignite inflation and prevent the Federal Reserve from returning inflation to its two percent target. Core PCE inflation was around three percent in 2025. The Boston Fed estimates that nominal wage growth contributed 1.9 percentage points, nearly four times the net contribution of tariffs after productivity is taken into account. In other words, tariffs cannot plausibly bear most of the blame for inflation remaining elevated even under the assumption of complete pass-through.
More Tariffs=Better Productivity
The striking finding is that the industries most exposed to tariffs also tended to experience the largest productivity gains.
The paper stops short of claiming that tariffs caused the productivity gains. But there is good reason to think that they played an important role. Faced with competitive pressure to keep prices low, firms had a choice between accepting lower profits and finding ways to become more efficient. Some invested in new equipment or reorganized production. Less productive firms may have left the market, shifting production toward more efficient competitors. Businesses also reduced labor inputs while maintaining production.
The findings fit with a San Francisco Fed paper published last year examining 150 years of tariff policy. That study found that tariff increases historically lowered inflation while raising unemployment, which could well be explained by firms raising productivity and therefore needing less labor. Its authors argued that tariffs often operate like negative demand shocks because uncertainty and falling asset prices reduce spending and investment. The Boston Fed has now identified another potential channel: firms respond to tariffs by lowering unit costs.
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