Boston Fed Economists Say Tariffs Not Main Cause of 2025 Inflation

Three economists from the Federal Reserve Bank of Boston argue that tariffs alone cannot account for the ongoing 3% inflation in 2025. While tariffs increased from 2.5% to 10% in that year, productivity gains managed to partially offset the cost increase, resulting in only a 0.5 percentage point contribution to core Personal Consumption Expenditures (PCE) inflation, according to Philippe Andrade, Omar Barbiero, and Alvaro Silva.

The sectors hit hardest by tariffs, namely data processing and motor vehicles, experienced significant productivity growth of 16.64% and 11.78%, respectively, which helped to mitigate the tariff-driven price hikes. The authors emphasize that productivity gains played a crucial role in offsetting the increase in consumer prices caused by tariffs.

They conclude that tariffs alone cannot explain the persistence of 3% inflation in 2025, and that other factors may also have contributed to inflation. New York Fed economists have noted that approximately half of companies continue to raise prices to pass through the costs of tariffs to consumers, more than a year after the initial tariffs were introduced during the Trump administration.

Recent surveys have identified two primary reasons for future price increases: contractual restrictions on price adjustments or gradual price hikes to avoid shocking customers with all-encompassing immediate increases. The New York Fed's February article highlighted that foreign exporters bore a growing portion of the cost of new tariffs, while U.S. importers continued to bear the majority of the burden.

Additionally, the authors found that global supply chains adapted to the new tariffs, with China's share of U.S. imports decreasing, while Mexico and Vietnam experienced the most significant gains.