Henry, you seem to be talking about price inflation, which is what most people understand inflation to mean thanks largely to the mainstream media.

The Reserve Bank isn't addressing price inflation at all, rather their rate rises/cuts are targetting monetary inflation; ie the supply of money into the economy. Will rate rises lower costs of goods? Of course not. Will they restrict the creation of new money via credit? Definitely.

The Reserve is _not_ putting up rates to, as you put it, "fight a global surge in the price of oil, foodstuffs and other commodities". They're doing it to stop credit-fuelled growth accelerating at an unsustainable rate & build up to an inevitable crash. Its nasty medicine now to prevent a raging fever later.

Therefore if they "enforce an outdated orthodoxy" as you put it, they're actually likely to look at the slowdown in the growth of the econnomy and conclude that the rate is ok where it is - rising prices aren't a factor in the equation at all.

It is obvious to me that interest rates need to be raised substantially, until the increase in savings starts to reduce our enormous foreign debt. It is unlikely that there will be enough time for any useful reduction before our debt is called in sometime in the next year or so, but any improvement would help.Our population is going to be forced to re-learn the importance of the old idea that if you want something, you save up for it first. Anyone who doubts that our debt will be called in should remember Napoleon's old saying:

"You don't worry about the stables when the house is on fire."

Faced with a collapse in our tourist industry due to astronomical airline ticket prices, and the end of the resources boom when China find that they can't sell their manufactured products overseas, the next few years are going to be very interesting.

I think the asian philosophers got it right:

The secret of life is not to want;

However this is quite difficult. So whilst wanting endeavour to consume as little as possible, and while consuming, for heavens sake don't SPEND!

I would think that an interest increase to 10 or 12% would create the right atmosphere. Will Kevin Rudd beat Keating's level of 17%?

That inflation is gathering momentum is no secret, how to deal with it is a thorny issue.

The economy until recently compensated for economic growth by increasing productivity until the spare capacity was completely absorbed. The economy was then pretty much on a knife edge with delicate control needed.

Just at that point the commodities boom accelerated, and the oil price shot up disrupting the balance, and boosting the economy. The only recourse for the RBA was to increase interest rates.

Rudd having lambasted the previous government has now set himself up to responsibly manage the economy. To do this he needs to bring the economy back into balance, and the longer he waits, the stronger the medicine needs to be.

The alternatives are to either reduce the money supply by increasing taxes, reduce spending, or let the RBA increase rates until the money supply is dried up.

Rudd has taken the politically expedient approach of spend more tax less and blame the increased rates on the previous government.