On something simple like this, the paint bucket is the way to go. One click gives you a single outline. Mini-Tut on my blog here
http://cleversomeday.wordpress.com/2009 ... -tutorial/
BTW, Robin. It helps if you understand that Inkscape is tracing both sides of your line, which is why you get double. If you can start with solid black letters (like talanhart's .jpg) then you will get a single line outline when you trace, too.
You want to start with what you want the finished cutout to look like, not what you want the cutting path to look like, if that makes sense.