Productivity Gains Helped Offset Tariff-Fueled Inflation

Productivity growth helped absorb much of the inflationary pressure from higher tariffs last year, though other forces kept price growth above the Federal Reserve’s target. (Mario Tama/Getty Images)

Key Points

• Productivity growth helped offset the inflationary impact of higher tariffs last year, though efficiency gains alone did not fully curb price growth.
• The personal consumption expenditures price index rose 2.9% in the 12 months through December 2025, while core PCE inflation was 3%.
• Positive productivity growth in 37 of 63 studied industries lowered per-unit production costs by 1.3% across all sectors.

Productivity growth helped offset the inflationary impact of higher tariffs last year, but efficiency gains alone were not enough to fully tamp down price growth.

Following President Donald Trump’s announcement of major tariff increases last year, economists expected a significant pickup in inflation. Price growth did accelerate, but the impact of tariffs was less pronounced than some had feared.

The personal consumption expenditures price index rose 2.9% in the 12 months through December 2025. Core PCE inflation, which excludes food and energy costs, was 3% year-over-year in December.

While that is above the Federal Reserve’s 2% target, inflation remained relatively contained even as the effective tariff rate on imports to the U.S. hit 11% in late 2025, according to research from the St. Louis Fed.

One of the biggest mitigating factors was the fact that sectors that were more affected by the higher levies experienced significantly greater labor productivity growth last year, according to new research published Wednesday by the Federal Reserve Bank of Boston.

U.S. labor productivity grew by 2.2% for the full year 2025, according to the latest data published by the Bureau of Labor Statistics.

Researchers calculated that across all sectors, tariffs increased costs for domestic producers by 1.1 percentage points. At the same time, 37 of the 63 industries studied experienced positive productivity growth. Across all sectors, those gains lowered per-unit production costs by 1.3%, the research found.

“These productivity gains could have helped companies reduce their costs and thereby mitigate inflationary pressures from the tariffs,” the researchers wrote.

Looking at the net effects, tariffs added 1.4 percentage points to core PCE inflation during the fourth quarter of last year, while wage growth contributed 1.9 percentage points. Labor productivity gains subtracted 0.9 percentage points from inflation, according to the research.

Taken together, those factors would imply core PCE inflation of 2.4%—below the actual 3% rate. That gap suggests that although productivity gains offset much of the tariff pressure, other forces were also pushing prices higher.

“It is hard to explain why inflation was 3 percent by resorting to only this new policy,” researchers wrote. “This suggests that other factors, whose effects on inflation may be less transient than those of tariffs, could have been significant contributors to inflation as well.”

Since peaking at around 11% in 2025, tariff rates have trended down—particularly after the U.S. Supreme Court struck down duties imposed under the International Emergency Economic Powers Act in February. As of May, the St. Louis Fed estimates that the effective tariff rate has fallen to just below 7%.

That signals that the pass-through effects of tariffs to PCE price growth have stabilized in recent months, pointing to other factors keeping inflation elevated.

Write to Megan Leonhardt at megan.leonhardt@barrons.com

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