Fighting the last war?

It is when we move to the anecdotes that the story gets interesting. Australia's miners are struggling to cope with China's insatiable demand for raw materials. The latest prices agreed for iron ore show an extraordinary 85 per cent hike.

Talk to a mining man and you will find someone struggling to get rubber tyres for his trucks and workers for his mines. Inflation is a powerful reality in the mining world and is spreading rapidly to include mine suppliers.

Farmers are not immune, battling drought, but with global food prices showing the prize for those who can produce crops or beasts.

A Sydney farmer, with important part-time jobs in the CBD, told Henry recently of his problem with steel star-pickets. His farm manager told him that the price of star-pickets was about to rise 7 per cent. As our Sydney farmer was able to earn 8 per cent in the money market he said not to buy the pickets. Then his manager said there was another 7 per cent price hike to come, very likely to be followed by a 15 per cent hike.

With the price of iron ore doubling in short order, the price of steel must follow. With the price of oil rocketing, the price of plastics has to follow. This is on top of the escalating cost of getting to work, with Australia's inadequate public transport too often providing an inadequate alternative to the family car.

How long can we ask ordinary non-mining workers to maintain wage constraint when the costs of food and transport are rocketing, along with their rent or mortgage?

But there is another side to the story of Australia's mining boom. What is its impact in squeezing the non-mining industries?

On the same day Henry spoke with his Sydney farmer he saw the principals of a PR firm. "How is the economy going?" they asked anxiously after Henry's immediate issue was dealt with. They had asked because their clients in the non-mining sector were almost all undertaking a round of tightening, with 20 per cent the highest target number for planned job cuts. The relevant clients include a number of blue chip Australian businesses, and what is happening is no routine pruning.

Presumably the board of the Reserve will have its own set of anecdotes to consider today. That is why the board contains leaders from the real world of commerce. The most important statistic Stevens will ponder is that for inflationary expectations of consumers, measured each month by the Melbourne Institute.

The May reading showed a sharp increase, to 5.9 per cent. As the graph shows, this measure has been rising for some time. Indeed, every inflation indicator is pointing up. Now the trend from 1998 can no longer be ignored.

The danger is that "The Enforcer" will enforce an outdated orthodoxy and do more damage to Australia's non-mining economy.

If the old orthodoxy is in place, the Reserve will raise interest rates again today.

If it has heeded the warnings of experienced observers, it will stay its hand. Not abandoning or suspending inflation targeting, just applying its claimed "flexibility".