One piece of big news today is a lower than expected CPI inflation report. Both topline and core — excluding food and energy — increased at a scant two-tenths of a percent in June. Stock prices rallied, and bond rates fell, so Wall Street liked the report. 

The Fed is still probably going to raise its target rate by another quarter of a point to 5.5 percent, though, frankly, no one is sure why it’s going to do so. But a quarter is small beer, not worth arguing over.  

The 12-month change for the CPI is 3 percent; that’s a point above the Fed’s 2 percent target. The core rate is 4.8 percent, more than twice the Fed’s target. So, I suppose you could justify more rate hikes, because actual inflation is still above the Fed’s target. 

If you look at market-based price indicators, though, the Fed may have already done enough. I’m thinking of the upside down yield curve, where short-term rates are way above longer-term yields. I’m also thinking of broad-based commodity indexes that really have been softening for more than a year. Also, a nod to Milton Friedman’s M2 money supply, which has collapsed over the past 18 months.  

The wonderful thing about these leading indicators of inflation is that the Fed doesn’t pay any attention to them. That’s too bad, because markets are smarter than economic models. Take a moment for context.  

In the mid-1980s, Ronald Reagan appointed three brilliant Fed governors: Wayne Angell, Manley Johnson, and Robert Heller, all good friends of mine. They pioneered the idea of using market-based price indicators, rather than Phillips curve models that purport to trade off inflation versus employment.  

Right now, you can bet the Fed staff thinks it has to tighten policy more, because the unemployment rate is still too low at 3.6 percent. In other words, too many people are working, and that must be inflationary. If you think that’s a stupid idea, you would be right. More people working and producing goods and services is counter-inflationary.  

But, back to the Reagan appointees. I would include a former Fed chairman, Alan Greenspan — also appointed by the Gipper — who testified before Congress that gold was an important inflation indicator. This group of Fed officials launched 20 years of price stability by using market-based price indicators.  

They never get credit for what became known as the Great Moderation. Principally, because they were Reagan appointees and the liberal press would never credit them with their awesome achievement. Basically, the Reagan supply-side tax cuts, along with the Fed’s strong commodity-based King Dollar, launched a 20-year economic boom. 

I’m not saying inflation is over yet. Especially with President Biden’s tax, spend, and regulate policies, which have stifled the economy and undermined incentives to work and invest. The top-down industrial policy of picking winners and losers with frenzied $6 trillion spending in return for campaign contributions from woke corporate allies — a grift sometimes called Bidenomics — is going to make the Fed’s job of finally reaching their 2 percent inflation target much harder.  

But, don’t despair, there’s a way out of this economic quagmire. Remember Reagan? Cut tax rates, and make King Dollar as good as gold.

From Mr. Kudlow’s broadcast on Fox Business Network.