The Bureau of Labor Statistics’ monthly Consumer Price Index (CPI) report on Wednesday showed that inflation continued to increase throughout June to a new 40-year high of 9.1%, up from 8.6% in May. It was higher than Wall Street economists’ 8.8% consensus estimate.

The stakes are high, with economists and business leaders (but not yet the White House) sounding the alarm about a potential recession on the way, and high inflation the thing that could tip the scales. 

Every time inflation stays high, the Federal Reserve is incentivized to hike interest rates, destroying demand in the economy to hopefully bring inflation down. The danger is that too much demand destruction tips the whole economy into recession.On Wednesday, leading economist Jeremy Siegel said that the worst of inflation has already passed, and as a result, the Federal Reserve and its chair Jerome Powell should be careful not to overshoot the mark when contemplating future policy changes.

“I think most of our inflation is behind us,” said Siegel, a professor of finance at the University of Pennsylvania’s Wharton School of Business, on CNBC’s Halftime Report.

CNBC anchor Scott Wapner pressed Siegel on changes to his economic outlook in recent months: “You wanted the Fed to be more aggressive than most,” he said about Siegel’s perspective earlier this year. “What are they supposed to do now?”

The Fed needs to see through the static in data relating to the overall health of the U.S. economy and recognize when data reflects the past more than the future, said Siegel: “Powell must be forward-looking.”

The June CPI data is backward-looking, said Siegel, and not necessarily reflective of the current state of the economy. “Printed numbers are going to remain bad even though the actual numbers are going to be getting much better,” said Siegel. “I assume Powell knows this.”

Fed-watching

Siegel seemed to imply that consumer spending data is a more accurate look into real-time economic activity. Last month, the Bureau of Economic Analysis (BEA) revealed the smallest incremental increase in consumer spending so far this year, 0.2%—evidence that the economy has cooled down significantly.

“The more important data will be the real data on economic activity,” said Siegel. “That’s going to be more sensitive because of the backward-looking nature of the CPI.”

Due to the signs that the economy is already slowing, Siegel said the Fed must be careful with further hikes to its baseline interest rate. The Fed instituted its first increase of 25 basis points in March. Another 50-bps hike followed in May, and then a 75-bps hike in June—the bank’s biggest since 1994. 

The Fed will likely initiate another 75-bps hike in July, according to Siegel, but shouldn’t impose anything more than that this year. “They have to turn around because the economy is really slowing,” he said.

Those policy changes so far have been good, he added. “We’ve slammed on the monetary brakes, the money supply, deposits in banks, to absolutely flatten it out,” he said, referring to the overheated post-pandemic economy. “I have not seen that in any of the statistics I’ve been following for the last 50 years.”  

Now, he said, it’s time to readjust. “But it also means that you’ve got to be very, very careful for what that means for the economy.”