Is productivity the middleman that's allowing for big corporate profits?

One of the mysteries we have had in the last year-plus is why businesses continue to report increased costs due to tariffs, but consumer prices haven’t risen by nearly as much over the same time. I’d theorized that there was something going on in the middle of those stages of production, and I got more evidence of that this week.

Robust U.S. productivity levels appear to have blunted the full inflationary impact of President Donald Trump's large-scale trade tariffs, new research from the Federal Reserve Bank of Boston said.

"Industries in which tariffs induced higher costs in ‌2025 also experienced greater labor productivity growth, which helped them mitigate those higher costs," bank researchers wrote in a paper ‌released on Wednesday.

That means that while firms may have confronted higher input costs due to the president's tax increases, by getting more output out of their workforces they were ​able to hold off on passing on those costs. That in turn helped inflation, which has been above the Fed's 2% target for half a decade, come in lower than it otherwise would have due to the taxes. Altogether, the tariffs, which rose from an average level of 2.5% before Trump's return to 10%, joined with healthy productivity rates, added 0.5 percentage point to the core level of the personal consumption expenditures price index, the ‌authors found. The analysts said firms facing strong tariff-related ⁠cost increases managed to keep output steady while cutting labor inputs, and "the reduction in hours contributed to greater labor productivity growth."

In other words, workers are the ones paying the price of the tariffs, even more than consumers are. Businesses are squeezing out more from their employees (and/or using fewer employees), which allows for both higher profits and limits on inflation.

It goes along with this chart that I brought up last week.

it helps explain why wage and job growth have been so lousy for American workers under Trump 2.0. And helps explain why so many people don’t trust data centers and AI initiatives these days, because we can see where workers and their pay raises keep getting squeezed out in favor of automation and money-trading schemes under the guise of “increased productivity”.

Next week, we get the first look at corporate profits for the 2nd quarter of 2026. Let's see if my theory holds up, especially in the wake of big increases in oil and gas prices between April and June. I suspect it will.