Wharton professor Jeremy Siegel says the forward-looking inflation picture looks good and the Fed can afford to be more moderate with upcoming rate hikes

• Jeremy Siegel said forward-looking inflation looks good, and the Fed can moderate its rate hike policy.
• He thinks just three more rate hikes are necessary for the Fed to meet the market's expectations.

July's Consumer Price Index was a relief and the inflation picture going forward looks good, Wharton professor Jeremy Siegel said Wednesday, adding that the Federal Reserve can probably afford more moderate rate increases at upcoming meetings.

July's CPI clocked in at 8.5% on Wednesday, lower than economists' expectations and down from June's reading of 9.1%. Core CPI, which strips out more volatile food and energy prices, was in line with June's figure but also lower than anticipated.

"Forward-looking inflation to me looks good, and [it] looks like the Fed can be more moderate," Siegel said in an interview with CNBC, adding that although more rate hikes would be necessary, it wouldn't require as aggressive of a response from the central bank as some have been expecting.

In Siegel's view, just three more moderate-sized hikes are necessary: "I would go 50 [basis points] and then two 25s at this particular point, to sort of complete market expectations," he said.

That's likely because much of the inflation reported in the CPI is lagging, which means that it will show prices coming down further in future readings and that the Fed probably doesn't have much work left to do to tame prices.

Siegel has been a critic of Fed Chair Jerome Powell for waiting too long to take action on inflation, which ultimately led the central bank to issue two 75 basis point hikes in May and June. The Fed's fight against rising prices buffeted markets in the first half of the year, with the S&P 500 closing out its worst start to the year since 1970.

Siegel is adamant though that, to prevent another mistake, the central bank needs to avoid overreacting to the most recent CPI data.

"I think [Powell] has to realize that the way the index is constructed, there is a lot of inflation that's still unfortunately going to push through on that official index, but has already been experienced by Americans in the market," Siegel said.

He added that sensitive commodities and housing data actually suggests inflation isn't as severe as it appears, and it'll continue to improve even if the CPI reading is elevated over the next three to six months.

The next meeting of the Federal Open Markets Committee meeting will happen in September. In the meantime, policymakers will be digesting a slew of new data points, including another six weeks of jobless claims data, another round of nonfarm payroll figures, and another CPI report on September 13.