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New research from the Federal Reserve Bank of Boston finds that the Trump administration’s sweeping tariff policy has exerted far less upward pressure on U.S. inflation than markets initially anticipated. The study, covering 63 industries, shows that sectors hit hardest by tariffs in 2025 simultaneously experienced faster labor productivity growth. Companies absorbed cost pressures by improving efficiency and adjusting production processes, reducing the net impact of tariffs on core PCE inflation from an estimated 1.4 percentage points to roughly 0.5 percentage points. The research indicates that nominal wage growth contributed approximately four times more to inflation than the net tariff effect, suggesting tariffs are not the primary reason U.S. inflation remains above the Federal Reserve’s 2% target. However, research from the Federal Reserve Bank of New York presents a contrasting view, arguing that tariff costs have been substantially passed through to consumers and that inflationary pressures may not yet have fully materialized.
Key Elements
After U.S. President Donald Trump pushed forward sweeping tariff policies, markets and economists widely warned that rising import costs could drive up corporate production expenses, which would then be passed on to consumers and reignite U.S. inflation. However, newly published research from the Federal Reserve Bank of Boston finds that industries hit hardest by tariffs in 2025 simultaneously experienced faster productivity growth, with companies absorbing part of the cost pressure through efficiency gains. As a result, the ultimate impact of tariffs on consumer prices was significantly lower than what a straightforward calculation of import costs would suggest.
The researchers note that industries facing tariff-driven cost increases in 2025 also saw higher labor productivity growth. When companies confront rising costs, they are not necessarily forced to pass all additional expenses onto consumers; they may also absorb part of the shock by improving efficiency. The study covers 63 industries, of which 37 showed productivity gains.
The researchers estimate that economy-wide productivity improvements lowered corporate production costs by approximately 1.3% and reduced core Personal Consumption Expenditures (core PCE) inflation by roughly 0.9 percentage points. By comparison, tariffs themselves increased U.S. domestic production costs by about 1.1%. When accounting for the full impact of tariffs on directly imported goods as well as goods produced in the U.S. using imported components and raw materials, the study estimates that tariffs pushed core PCE inflation up by approximately 1.4 percentage points.
However, after incorporating the offsetting effect of corporate productivity gains, the net impact of tariffs on core PCE inflation shrinks to roughly 0.5 percentage points. The research therefore concludes that productivity growth substantially offset the consumer price increases that tariffs might otherwise have caused.
The Productivity Offset Mechanism: How Companies Absorb Tariff Costs
These findings diverge markedly from predictions by some economists that tariffs would inevitably cause severe inflation. The prevailing argument at the time was that rising prices for imported goods and raw materials would increase corporate costs, which companies would then pass through to final goods, ultimately driving sustained increases in overall prices.
Yet the Boston Fed’s research shows that even under relatively strict assumptions—namely, that companies fully pass increased production costs onto consumers—the inflationary effect of tariffs was still significantly offset by productivity gains. The study itself adopts a notable assumption that companies would fully reflect higher production costs in their selling prices, though actual business conditions may not work that way.
When companies face rising prices for components, raw materials, or imported finished goods, they often must choose between raising prices and maintaining market share. If a company believes that price increases could drive consumers toward competitors, it may choose to absorb some costs itself, trading lower profit margins for market share. The actual tariff costs borne by companies may therefore be more complex than a simple assumption that “costs rise by X, so prices rise by X” would suggest.
In this context, the 0.5 percentage point net tariff inflation impact calculated by the Boston Fed may even overstate the costs that some companies actually pass on to consumers. However, the study’s focus is not to prove that tariffs have no effect on prices, but rather to point out that corporate productivity responses may represent an offsetting force that has been easily overlooked in past models.
The researchers note that industries more heavily affected by tariffs tended to show more pronounced productivity growth. The researchers do not directly claim that “tariffs caused productivity gains,” so the simultaneous occurrence of the two cannot simply be treated as a causal relationship. Nevertheless, the findings do suggest a possible economic mechanism: when companies face rising costs and competitive pressure, they may be compelled to find new ways to reduce per-unit production costs.
Companies can choose to accept lower profits, or they can improve efficiency to maintain existing prices and market competitiveness. Some companies may accelerate investment in new equipment, upgrade production technology, or reorganize production processes. Companies may also boost output per worker by reallocating labor and capital. If certain less efficient firms cannot withstand cost increases and exit the market, market share and production activity may gradually shift to more efficient competitors, further lifting average productivity across the industry.
Thus, the impact of tariffs on companies is not necessarily limited to a single path of “cost increases → price increases”; it may also involve an adjustment process of “cost increases → companies improve efficiency → unit costs decline.”
Tariffs Are Not the Primary
Looking at the overall inflation structure, the research also shows that tariffs do not adequately explain why U.S. inflation has remained relatively elevated. U.S. core PCE inflation was approximately 3% in 2025. The Boston Fed estimates that nominal wage growth alone contributed about 1.9 percentage points—nearly four times the 0.5 percentage point net tariff impact after accounting for productivity offsets.
In other words, even under the assumption that companies fully pass through tariff costs, the net impact of tariffs on core inflation remains far below other factors such as wage growth. The researchers write in their paper: “Productivity gains substantially offset tariff-induced consumer price increases. If only labor productivity improvements are considered, the rate of price increases should be closer to 2%, rather than the actual levels observed over the past year.”
The researchers further note that factors other than tariffs may have more persistent effects on inflation and could likewise be important sources of price pressure. This makes it difficult to support the claim that “tariffs are the primary reason U.S. inflation remains persistently above the Federal Reserve’s 2% target” based solely on these research findings.
This also touches on an important debate in U.S. monetary policy. If the inflationary shock from tariffs is not as persistent or widespread as originally predicted, the Federal Reserve needs to consider how companies adjust their cost structures and whether productivity growth can continue to offset some price pressures when assessing inflation risks.
Historical Research Echoes: Multiple Pathways of Tariff Impact
This study also resonates with earlier research from the Federal Reserve Bank of San Francisco. That research examined roughly 150 years of tariff policy from a long-term historical perspective and found that past tariff increases in some periods actually coincided with declining inflation and rising unemployment.
One possible explanation is that companies, responding to tariffs and cost pressures, improved production efficiency and reduced their demand for labor. If companies can maintain the same output with fewer workers, labor productivity rises, but the job market may also come under pressure.
The San Francisco Fed research also suggests that tariffs can sometimes produce effects similar to a “negative demand shock.” When trade policy increases uncertainty and asset prices come under pressure, businesses and households may reduce spending and investment, thereby dampening overall demand.
This means the economic impact of tariffs may operate through multiple pathways simultaneously. On one hand, tariffs raise the cost of imported goods and production inputs, exerting upward pressure on prices. On the other hand, companies may reduce unit costs through productivity gains, while trade uncertainty and reduced investment may weigh on economic demand.
Divergent Academic Views: The New York Fed Disagrees
Notably, views within the Federal Reserve System on the inflationary effects of tariffs are not uniform. Recent research from the Federal Reserve Bank of New York argues that tariff-driven cost increases have been substantially passed through to consumer prices, and that inflationary pressures from Trump’s trade policies may not yet have fully materialized.
Over the past year and a half, Trump’s tariff policies have been a central issue in the inflation debate. After pandemic-related supply chain disruptions and expansionary government support policies drove prices sharply higher, inflation was gradually returning to target levels as Trump returned to the White House in early 2025. However, import tax increases became a key factor in the eyes of many Federal Reserve officials and private economists for inflation reaccelerating.
In recent months, Federal Reserve officials have attributed above-target inflation to the lingering effects of tariffs, while also expecting those effects to gradually fade. Additionally, energy price increases related to the war with Iran and the U.S. technology infrastructure construction boom have also supported inflation. Many observers hope that artificial intelligence investments driving technology spending will eventually become a force for reducing inflationary pressures at some point in the future.
The Boston Fed researchers note that the phenomenon of productivity constraining inflation may stem from longer-term trends, or it may result from companies dependent on high-cost foreign components being forced out of the market. The researchers state that companies, under tariff-driven pressure from rising input costs, may also boost productivity by increasing investment in equipment and production systems to reduce labor costs.
This means the simplified model of “tariffs inevitably cause severe inflation” faces a growing number of complex factors that must be incorporated—including corporate behavior, productivity, employment, and investment responses.
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