David Miles begins by considering how the economy has evolved against the backdrop of the banking crisis. He explains that the repayment of debt by households and firms, coupled with low confidence, has led to a period of weak growth and re-balancing. At the same time short-term inflation pressures have risen, making the setting of monetary policy difficult. But while inflation is likely to remain above target for all of 2011, and much of 2012, he believes there are good reasons to think that its current elevated level is unlikely to persist. Underlying domestically generated inflation - which is likely to be the dominant force for inflation over the medium term - is relatively low. Wage growth has been particularly weak, a reflection of the degree of slack in the labour market.