Inflation rose slightly in November, according to the Bureau of Labor Statistics. The Consumer Price Index (CPI) grew 0.1 percent last month after remaining essentially unchanged in October. Year-over-year headline inflation was 3.1 percent; Excluding food and energy prices, it was 0.3 percent in November and 4.0 percent year-over-year. Continuously compounded annual rates, which likely give a better picture of real-time price pressures, were 1.16 percent for headline inflation and 3.41 percent for core inflation.

Prices for used cars and trucks, medical care commodities, shelter, and medical care services went up the most. These more than offset a continued decline in energy prices, especially gasoline prices. The overall picture is a small increase in inflation, accompanied by significant sectoral (microeconomic) changes driven by altered supply-and-demand conditions.

Despite the inflationary uptick, monetary policy remains tight. The fed funds rate target range is currently 5.25 to 5.50 percent. Let’s adjust this for inflation using the core year-over-year rates (as opposed to the continuously compounded rates) to steelman the argument. The implied real fed funds target range is 1.25 to 1.50 percent.

As always, we need to compare this to the natural rate of interest. This is the inflation-adjusted interest rate that balances the supply of short-term capital against competing demands for its use. When this rate prevails in the market, the economy is producing as much as it sustainably can, and hence inflation will not accelerate. Estimates from the New York Fed suggest the natural rate is between 1.19 and 1.34 percent.

Market rates in excess of natural rates are evidence for tight money. While there is some overlap in the range, it’s important that the bottom- and top-end for the actual fed funds rate exceed their natural-rate levels. Remember, we used the least favorable inflation figure to derive this result. Using the headline (3.1) percent figure, there is less ambiguity. Using the continuously compounded rates, there is even less. And the whole exercise using PCEPI instead of CPI suggests monetary policy is not only restrictive, but significantly so. We have good grounds to believe monetary policy is currently tight.

We see more of the same when we look at the monetary aggregates. The M2 money supply is approximately 3.30 percent lower today than a year ago. The Divisia aggregates are falling between 1.03 and 1.98 percent per year. These figures are particularly important because they weight money-supply components based on liquidity. Although they are shrinking more slowly than in recent months, the net effect is disinflationary.

The FOMC will announce its next interest rate decision this week. I expect they will keep rates unchanged. The slight bump in inflation won’t spook them into going even tighter. And despite the cries from financial markets, it’s too early to contemplate cuts. Expect more of the same for monetary policy to close out the year.