Labor productivity improvements in 2025 offset nearly all the inflationary pressure from tariffs, contributing just 0.5 percentage points to core inflation despite a massive jump in import duties, according to a new analysis from the Federal Reserve Bank of Boston published this month. The finding challenges the common explanation that tariffs alone kept inflation stuck at 3 percent last year. Instead, the authors conclude that other forces must have been at work, since productivity gains should have brought inflation closer to the Federal Reserve's 2 percent target.
The average realized tariff on US imports climbed from roughly 2.5 percent to about 10 percent in 2025, the report notes. Those levies raised production costs by 1.1 percentage points across all domestic sectors when aggregated. Goods industries bore the brunt: motor vehicles, primary metals, and electrical equipment saw the largest cost jumps. But services sectors weren't spared—broadcasting and telecommunications faced a 1.30 percentage point cost increase because imports make up 7.5 percent of the sector's total expenses. Meanwhile, labor productivity—defined as real value-added per hour worked—rose in 37 of 63 industries examined. Data processing led with 16.64 percent growth, and motor vehicles followed at 11.78 percent. Petroleum and coal saw the steepest decline, dropping 12.98 percent. When researchers tallied the economy-wide impact, productivity gains lowered per-unit costs by 1.3 percent, nearly canceling out the tariff-induced increase.
The same sectors hit hardest by tariffs experienced the biggest productivity jumps, the analysis shows. Industries facing stronger upward cost pressure from import duties were the same ones posting relatively greater labor productivity growth in 2025. That correlation wasn't driven by more hiring or longer hours—in fact, sectors most exposed to tariffs saw hours worked decline and real value-added growth hold steady. The labor share, or the slice of output going to worker pay, fell more sharply in tariff-affected sectors, meaning real wage growth didn't keep pace with productivity. The authors note their evidence isn't causal: the pattern could reflect preexisting trends, the exit of less efficient firms dependent on foreign goods, or new investments in equipment to compensate for higher input costs.
The findings carry major implications for understanding what actually drove inflation last year. Tariff-related cost pressures added 1.4 percentage points to core personal consumption expenditures inflation, the report estimates, while productivity gains subtracted 0.9 percentage point—a net contribution of 0.5 percentage point. Wage growth accounted for 1.9 percentage points, bringing the total explained inflation to 2.4 percent. That leaves 0.6 percentage point unexplained out of the roughly 3 percent core inflation realized. The authors suggest other factors, potentially more persistent than tariffs, were significant contributors as well. Given the offsetting power of productivity, the report concludes, the new trade policy alone can't explain why inflation remained elevated—and those other forces may prove harder to shake.