Tariffs lower inflation initially, then raise it: US Fed San Francisco

"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," they wrote in an economic letter.

"Over time, however, economic activity picks up and inflation increases to a higher rate than would have been the case without the tariff increase," they said.

The authors—Naomi Halbersleben, Òscar Jorda and Fernanda Nechio—analysed 40 years of international data trading unemployment and inflation following a change in tariffs.

"In other words, it seems that demand factors prevail in the short run, but supply factors dominate in the long run," they concluded.

"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," they wrote.

However, they cautioned about interpreting the results, as the tariffs implemented by the United States are unusually large and are surrounded by uncertainty.

ALCHEMPro News Desk (DS)