Inflation in the US is at a 40 year high. That is the sort of level that legitimises worries over a cost of living crisis. The only response that the Federal Reserve can have over surging inflation is to hike interest rates. The question is have US stocks felt the full impact of this yet?

Inflation is higher in the US than in Europe

The Financial Source team have a handy comparison between US headline inflation and the other major economies. You can see that US inflation is leading the pack.

The main categories of inflation are in the info graph below. As you can see many consumables are being impacted by inflation so the Fed will have to act. If inflation enters into wages then inflation can become endemic and extremely hard to deal with. As a result, the Fed will need to be aggressive in hiking rates.

The implied rate probabilities based on interest rate derivatives has the Fed making over six 0.125 rate hikes this year. That’s a hawkish tilt and that does make a case for another leg lower in equities.

20% falls is the panic area for the Fed

The recent falls in the S&P500 have been just over 12%. The level where most analysts think that the Fed will change its outlook and look to support the US economy would be if the S&P500 fell to around 20-25%. So, with only around 12% falls this means another leg lower could be in order. The area to look for dip-buying would be in the 3600/3700 region should we get there.