From Boston Brews to Ringgit Rhythms

Boston Barista Blues: When Your Latte Costs Your Raise

Imagine you are a Harvard student, and you took a job as a part-time barista at a trendy Boston cafe. You love your job. You get to enjoy the aroma of freshly brewed coffee every day and you are paid well. In fact, you have just received a $2 raise, bumping your hourly rate to $17. Sure, your boss likes your work, but the real reason is that she had a hard time hiring someone new.

You are not alone. Many of your fellow baristas, servers, and other workers in the city have also seen their wages go up in 2023. The United States (US) labour market has moderated since then but remains robust. Its economy added 199,000 jobs in November with 40,000 of these jobs in the leisure and hospitality sector including baristas.

You finish your shift and get a latte to go. $4.90, what a rude awakening! Your wage barely covers your caffeine fix. The was the average price of a cup of a coffee in the United States (US) in June, or about RM23, up 7.6% from the same period last year (yoy). Perhaps you should make your coffee at home instead? Unfortunately, the cost of brewing your own coffee increased by 15.8% in the same period. Home brewing costs leaped by 15.8% in the same timeframe.

These weren't isolated incidents; these were the bitter echoes of headline inflation, a resounding 9.1% yoy, that permeated every good and service.

What has been brewing? On one hand, the US economy continues to boom since it reopened following the pandemic, especially with the government providing stimulus cheques. On the other, we saw supply-side shocks in the form of higher energy prices following the war in Ukraine and various supply chain disruptions such as the Ever Given container ship blocking the Suez Canal. Is there an end in sight to the price hikes?

The Fed's Bitter Brew

Some good news, and some bad news. The supply-side situation has eased a lot this year. For the demand, enter the Federal Reserve (The Fed), the central bank of the US. Their job? To keep the US economy humming along smoothly, like a perfectly brewed latte.

To tame the inflation beast, they've administered a potent shot, hiking the Fed funds rate (the overnight lending rate for banks) by a staggering 525 basis points since 2022. This means borrowing gets pricier while saving gets sweeter. This way, the Fed hopes to slow down the spending and the demand in the economy.

The Ringgit's Dance: Stuck between Beats

Boston baristas fret over inflation, but in Malaysia, the ringgit’s rhythm is different. Bank Negara Malaysia’s (BNM) cautious waltz brought the overnight policy rate (OPR) to 3.00% in stark contrast to the Fed’s energetic jig that brought the FFR to 5.50%. This clash of rhythms led to the ringgit to stumble – nearly reaching RM4.80 against the dollar, the weakest since the Asian Financial Crisis.

What caused this stumble? The culprit is the “capital tango”, the flow of money between nations. When the Fed raises rates, it attracts investors and savers, luring their money to the US and boosting the dollar's value. This capital exodus, particularly pronounced in the second half of 2023 due to the widening interest rate gap, has left the ringgit on the back foot.

However, BNM’s priorities lie closer to home. Unlike many economies, Malaysia shielded itself from the full brunt of global inflation with subsidies and price controls. The inflation we did see was likely caused by external factors such as the global prices of oil and food. BNM is likely concerned that if it hikes interest rates too aggressively, it could prematurely derail the country’s post-pandemic recovery.

Scent of Optimism

The story of the coffee in Boston and its link to the ringgit shows how the global economy can be interconnected and complicated. Just like a well-balanced latte, hope simmers alongside the bitterness. A slower tempo by the Fed could send capital dancing back to Malaysia, strengthening the ringgit and easing the squeeze on wallets across the ocean.

As markets anticipate the Fed's potential pivot, the ringgit already shows signs of regaining its footing with the ringgit coming off its lows to trade in the RM4.60-4.70 range (at the time of writing). As the dawn of a new year approaches, there is a scent of optimism, potent as freshly ground coffee beans, that fills the air.