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Evan Horowitz | Quick Study

As Massachusetts goes, so might the US economy

Eric Rosengren, president of the Federal Reserve Bank of Boston, was the keynote speaker at the Greater Boston Chamber of Commerce breakfast at the Westin Boston Waterfront hotel Friday morning.
Eric Rosengren, president of the Federal Reserve Bank of Boston, was the keynote speaker at the Greater Boston Chamber of Commerce breakfast at the Westin Boston Waterfront hotel Friday morning.Rose Lincoln for The Boston Globe

Residents of Massachusetts, beware. You are living on the economy’s cutting edge, which is a risky place to be for businesses and consumers.

At a Friday breakfast meeting of the Greater Boston Chamber of Commerce, Boston’s Federal Reserve president Eric Rosengren laid out some of the unique challenges that come from being in the economic vanguard. Like the possibility that our super-low unemployment rate may also stoke super-high inflation.

Nationwide, the unemployment rate is 4.1 percent and projected to drop to 3.8 percent by year’s end. But at the Westin Boston Waterfront hotel Friday, Rosengren was quick to emphasize that “Massachusetts, and certainly northern New England, are already below that number,” with the state’s unemployment rate now at 3.5 percent.


But that’s not the only figure placing Massachusetts in the vanguard. Greater Boston also has one of the highest inflation rates in the country. As of March, inflation in Boston was running at 3.6 percent, well above the 2.4 percent national rate. Even if you leave out volatile categories like food, energy, or housing, inflation in Greater Boston still looks relatively high.

This combination — extremely low unemployment, higher-than-average inflation — is potentially worrisome. In fact, it’s exactly the scenario the Fed is trying to avoid by raising interest rates.

What concerns the Fed is the prospect of spiraling inflation, spurred by the following feedback loop: Businesses that are struggling to find workers start offering higher pay, which they can only afford by raising prices for consumers and thus driving up inflation.

For workers, this risk may seem pretty remote. If your wages are rising — and you finally have the leverage to ask for a raise, knowing your boss will have a hard time replacing you — it’s hard to get worked up about a potential multistep process that could turn your swelling paycheck into higher consumer prices for all.


But businesses have a different perspective. For them, rising wages mean higher costs, which puts pressure on balance sheets and cuts into potential profits. Think of your favorite restaurant. If salaries grow, the owner will need to compensate in some other way — maybe by increasing efficiency, but perhaps also by increasing the price of the daily special.

Across most of the country, such fears remain largely theoretical. Inflation has risen slightly in recent months, but it remains well below the Fed’s own target.

Massachusetts may be different, especially if the recent rise in inflation continues in the months ahead. That would make the state ground zero for testing the theory that America is approaching a tipping point — where unemployment gets so low that wages and inflation spiral upwards.

Rosengren noted Friday that he’s already hearing stories of local businesses having difficulty finding workers (at least, at the offered pay rate).

But there is one redemptive possibility: Maybe the universe of potential workers is larger than people suspect.

There are some nonworking people who might yet be coaxed from the sidelines, including those who have been reluctant to work — perhaps because they were in school, or taking care of family —

and those who have been overlooked by businesses, maybe because they need additional training or lack traditional credentials.

To reach these potential employees, businesses need better outreach and more flexibility when it comes to hiring requirements. That could be especially welcome news for struggling cities like Springfield, Lowell, and Lawrence, cities where the job market isn’t nearly as tight as Boston’s. In Rosengren’s view, such places “are centrally important to bringing people back into the labor market.”


What happens in Lowell, then, may prove a harbinger for the country as a whole. If Massachusetts businesses can find new workers by drawing on untapped pools across the state, that will blunt arguments that America’s economic recovery has passed its peak and that the unemployment rate has fallen too low.

But if this strategy fails, and expanding businesses find they have no choice but to pay higher wages — and charge higher prices — to attract workers, then Massachusetts may get invoked as a cautionary tale, proof that the country is close to an inflationary threshold, and that the Fed had better hit the brakes hard.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.