It is an unfortunately anthropomorphizing term for a transformer simply operating as designed, but the thing it's become a vernacular shorthand for, "outputting a sequence of tokens representing a claim that can be uncontroversially disproven," is still a useful concept.

There's definitely room for a better label, though. "Empirical mismatch" doesn't quite have the same ring as "hallucination," but it's probably a more accurate place to start from.