A new Fed Study suggests that the responses of the different components of inflation to tariff changes can reduce inflation by depressing demand in the short run. Over time, however, our findings suggest that tariff increases will be gradually passed through, raising inflation.
The Effects of Tariffs on the Components of Inflation
Federal Reserve Bank
Research
15 Pages
Key Takeaways
Demand Hits First: A 10% tariff increase lowers headline inflation by 1 point in year 1, suggesting the initial shock works more through weaker demand than immediate pass through.
Goods Rise Later: Goods inflation peaks in year 2, rising 1.2 points on average after a 10% tariff increase, showing the pass through arrives with a lag.
Services Linger Longer: Services inflation peaks around 0.6 point in year 3 and remains about 0.5 point higher by year 4, important for a category that is about 60% of CPI.
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