There have always been rumors that Lewis Carroll was 'under the influence' when he wrote 'Alice's Adventures in Wonderland.' The rumors have always been denied, but Disney didn't do much to stop the speculation when they released their animated version of the tale.
Most of the more bizarre things Alice experiences in the movie happen after she's eaten or drunk something questionable - mushrooms, in particular, were playing a big part. Also, the caterpillar is smoking a hookah. There's no misinterpreting that.