Boston Fed: productivity gains in 2025 muted tariff inflation impact
This digest was compiled by AI from multiple sources — links to the originals are below.
The Federal Reserve Bank of Boston released research Wednesday finding that robust U.S. productivity in 2025 blunted much of the inflationary impact of President Donald Trump's tariffs. Industries facing higher tariff-induced costs cut labor inputs and raised output per worker, holding off cost pass-through. Tariffs rose from an average 2.5% to 10% and added 0.5 percentage point to core PCE inflation, the paper estimates, even as separate New York Fed research sees stronger tariff pass-through.
Key Facts
- The Boston Fed paper released Wednesday found that industries facing higher tariff-induced costs in 2025 also recorded greater labor productivity growth.
- Average U.S. tariffs climbed from 2.5% before Trump's return to 10%, adding an estimated 0.5 percentage point to core PCE inflation.
- The researchers wrote that with the observed productivity gains, inflation should have been closer to 2% rather than the levels that prevailed over the last year.
- New York Fed research has found that tariffs have been passed on strongly to consumers and more inflation is yet to come from Trump's trade policy.
Productivity Gains and Tariff Costs
The Boston Fed paper found that industries with tariff-induced cost increases in 2025 also experienced greater labor productivity growth, which helped them absorb those costs. Researchers wrote that firms facing strong tariff-related cost increases kept output steady while cutting labor inputs, and the reduction in hours contributed to higher productivity. Average tariffs rose from 2.5% before Trump's return to 10%, and combined with productivity gains they added 0.5 percentage point to core PCE inflation. Productivity gains strongly offset the increase in consumer prices induced by tariffs, the economists wrote. Given the labor productivity gains, inflation should have been closer to 2% rather than the levels that prevailed over the last year, the paper said.
Fed Inflation Debate
Over the last year and a half, Trump's tariffs have played a central role in the debate over inflation and how the Federal Reserve should manage monetary policy. Inflation had been moving back to the Fed's 2% target when Trump returned to the White House at the start of 2025 after surging during the COVID-19 pandemic and expansive government support. Many Fed officials and private-sector economists viewed Trump's import tax increases as a key factor in renewed inflation. Other Fed research has contended that tariffs have been passed on strongly to consumers, and recent work from the New York Fed said more inflation is yet to come from Trump's trade policy. The Boston Fed economists concluded that productivity gains strongly offset the increase in consumer prices induced by tariffs.
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Boston Fed: productivity gains in 2025 muted tariff inflation impact
