Larry Kudlow

For months, the inflation hawks have been decrying the upward price of gold and the weakening dollar -- both historic signals that prices are headed up. They've made the loud argument that inflation is on the way, and to stave it off the Federal Reserve must raise interest rates -- quickly, and by a good amount.

At least for now, they are flat out wrong: The latest consumer price index, which arrived this week, shows a tiny 1.1 percent increase over the last 12 months. One core measure registered an anemic 0.6 percent rate.

While the CPI is surely a backward-looking inflation indicator, forward-looking gold dropped over $13 to $408 on the news. The 10-year Treasury bond has dropped below 4 percent instead of rising over 5 percent. This is a big surprise. "Inflation is not even a remote risk in the U.S.," according to Fed governor and former Princeton economist Ben Bernanke.

Gold is actually not so high. In constant dollar terms, today's gold price is only $383, a far cry from the gold and inflation spiral of 25 years ago. So there's not a boatload of excess money out there.

The weak dollar argument being used by the inflation hawks also appears to be bottoming out. The Europeans are getting set to put a lid on the appreciation of the euro, which has been hammering the dollar and holding back their economy. It's likely the European Central Bank will intervene in favor of the dollar and cut their overnight policy rate -- presently at 2 percent -- by a quarter or even a half percent. Any turnaround in the greenback will be slow, but it could well appreciate by 10 percent or more this year.

Of course, the U.S. economy is growing rapidly, while the Euros are hardly growing at all. U.S. retail sales closed the year up 6.7 percent, with overall real consumer spending up about 4 percent. Since the end of 2002, U.S. real gross domestic product has risen about 4.5 percent, business investment about 8.5 percent, productivity roughly 5 percent, and profits about 30 percent. Stocks are roaring. Eurozone economies have nothing even remotely close to this American performance.

Meanwhile, low tax rates, price stability and steady-as-you-go interest rates in the United States will produce another year of spectacular growth. Seeing this, even Democrats in Iowa have taken to trashing each other, instead of the Bush boom.

Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.