Inflation is falling, but it’s even lower than it looks if you take out Jeremy Siegel’s least favorite CPI signal

January 12, 2023, 8:45 PM UTC
Traders work on the floor of the New York Stock Exchange during morning trading on January 04, 2023 in New York City. U.S. stocks rose at the start of the second day of trading in 2023.
Traders on the floor of the New York Stock Exchange.
Michael M. Santiago/Getty Images

The Federal Reserve has been locked in a battle with inflation for nearly a year, raising interest rates seven times and shrinking its balance sheet in an attempt to restore price stability in the U.S. Now, according to Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business, that work is mostly done.

“We are in a deflationary mode. It is time to stop raising rates,” Siegel told CNBC on Thursday.

Inflation, as measured by the consumer price index, declined 0.1% in December, but remained well above the Fed’s 2% target at 6.5% for the past 12 months, the Bureau of Labor Statistics reported shortly after Siegel’s comments. But the Wharton professor argues that CPI—the most common measure of U.S. consumer prices—is misrepresenting the actual amount of inflation in the U.S. economy.

“I think we have to realize how much upward bias the reported CPI has,” he said. “You really should be subtracting about three-tenths or four-tenths off of that index to get current inflation.”

Siegel has been pointing to the fact that the popular index’s shelter component that measures home prices and rents works with a lag of several months, arguing that it has led to juiced inflation readings that confuse Fed officials. As early as August, he said that inflation is “peaking in the real world.” And lately, his warnings have become more consistent and pointed. Last month, he said that inflation was “basically over” and the Fed was “making a terrible mistake,” leading the economy toward a recession by continuing to raise rates.

Siegel believes that the misleading housing data the Fed uses is boosting core inflation—which excludes more volatile food and energy prices. Core CPI rose 0.3% in December, but shelter prices make up over 40% of that core inflation, Siegel said. And the finance professor noted that shelter prices, as measured by the CPI, have jumped by an average of just over 0.7% in the last three months while other measures of U.S. home and rent prices have gone in the other direction.

In December, for example, the CPI shelter component rose 0.8% month-over-month, and 7.5% from a year ago. But Apartment List’s National Rent Report for 2023 showed rent prices sank 0.8% in December. And between June and October 2022, U.S. home prices as measured by the Case-Shiller National Home Price Index dropped roughly 3%.

“By looking at the lagged way the Fed looks at housing, it’s over estimating inflation,” Siegel emphasized on Thursday. “And that’s one of the reasons why I say they’ve got to slow down [interest rate hikes]. We are in a negative inflation mode right now.”

The professor added that he still believes Fed officials will soon side with him and decide they no longer need to raise interest rates, which could bode well for stocks. 

“The Fed is eventually going to get it,” he said on Thursday. “They’re a little slow at this, but there has been discussion at the Fed about that housing index.”
Siegel famously argued back in November that a 20% jump in the U.S. stock market is possible if the Fed recognized inflation is all but defeated and paused its rate hikes.

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