The Bank for International Settlements published a Quarterly Review article using two multi-sector models to assess how higher import tariffs affect output, inflation and monetary policy in the short run. It finds tariffs tend to reduce output in most jurisdictions, but their inflation effects depend on whether a country imposes tariffs, its exposure to the United States and the extent of supply chain disruption, leaving some central banks facing a sharper trade-off between stabilising activity and inflation. Using tariff announcements as of 25 August 2025, including differentiated US tariff rates and retaliatory tariffs on US exports by China and Canada, the modelling points to the largest effects in the United States and its major trading partners. Output is projected to fall most in Canada (1.2%) and Mexico (1.0%), with smaller declines in Vietnam (0.3%), Brazil and India (a bit more than 0.2%), and China and Germany (0.1–0.2%). Price-level effects vary materially, including a 0.5% decline in Mexico and 0.4% in Brazil, while Canada’s price level is projected to be essentially unchanged as retaliatory tariffs add to domestic cost pressures. Sectoral spillovers are central to the results: for the United States, the services sector accounts for around half of the output drop and more than half of the increase in inflation, and in the United States, Canada and Mexico around 30–50% of the output decline is attributed to services despite services not being directly subject to tariff changes. Policy simulations suggest that where tariffs transmit as a supply shock, “looking through” the initial price-level jump can reduce the projected cumulative US output loss over the first three years from 1.6% to 0.1% of annual GDP, but at the cost of higher inflation and a greater risk of larger subsequent rate increases if inflation expectations become less anchored; where tariffs resemble a demand shock, such as in Mexico, a look-through approach leaves both output and inflation further from target than a standard Taylor-rule response.
Bank for International Settlements 2025-09-15
Bank for International Settlements research quantifies tariff-driven output losses and uneven inflation effects across economies
The Bank for International Settlements used multi-sector models to assess short-run effects of recent US and retaliatory tariffs on output, inflation and monetary policy. It projects the largest output declines in Canada (1.2%) and Mexico (1.0%), with smaller falls elsewhere, and significant spillovers to services. Simulations show that treating tariffs as a supply shock and “looking through” the initial price jump can reduce US output losses at the cost of higher inflation, but in economies where tariffs resemble a demand shock, such as Mexico, this worsens both output and inflation relative to a standard Taylor-rule response.