Wharton professor Jeremy Siegel says inflation is 'overstated' and the Fed may overtighten if it doesn't correct their view on high prices

• Inflation is being overstated in official reports, according to Wharton professor Jeremy Siegel.
• The top economist said inflation lags behind the official statistics for about 18 months, and prices are already falling.

Inflation is being overstated in the economic data, and the Federal Reserve risks making a policy mistake if it doesn't adjust its view on falling prices, Wharton professor Jeremy Siegel said.

The top economist pointed to the August Consumer Price Index report on Tuesday, which showed an above-expectation inflation reading of 8.3%. That caused stocks to plunge to their largest one-day decline since June 2020, a sign investors are already pricing in more pain caused by Fed rate hikes.

But inflation lags behind the CPI report, Siegel said, who has previously warned that the Fed is being too hawkish in its current policy stance, and that the stock market will actually surprise to the upside as inflation continues to fall.

"We've actually had a lot more inflation over the last 18 months than recorded in the official statistics, and we're going to show a lot more inflation in [the] next 18 months," Siegel said in an interview with CNBC on Wednesday.

That delay is largely due to the housing market, which accounts for 50% of core inflation. Although housing prices were up by 40% in the previous year-and-a-half, the CPI Housing Index only saw an uptick of 7%-8%. And now, the reality on the ground is that prices have stopped rising, Siegel says.

"Will you see that in the CPI? No, you will not see that in the CPI for 18 months. What I'm saying is we're going to get that overstatement [in inflation] just like we saw that understatement," he added.

Siegel previously argued that the Fed should only raise rates by another 100 basis points before making a more dovish pivot. But he warned the central bank could overshoot and overtighten the economy, pointing to Goldman Sachs' prediction that the Fed would issue a 75 basis point rate hike in September and two more 50 basis point rate hikes by year-end.

"If they take a correct view on what inflation is, they may not have to go that high. That's the relief the market is watching," he added.

His fear is that the central bank will assume inflation to be stickier than it actually is, and stick to its "higher for longer" mantra on rates.

"That would be a policy mistake," Siegel warned. "I think they're going to look at the economy, and I hope they understand what the statistics are and what on the ground inflation is."