contributed to low inflation internationally. i will then discuss how the domestic inflation process may be changing and how the phillips curve may be flattening ( more on that later ). finally i will discuss the policy implications of these developments and some of the associated risks. global factors and low inflation the increasing globalisation of the world economy – the breaking down of barriers between product and factor markets – has been a major contributor to low inflation in advanced economies. 2 globalisation over the past ten years has had many aspects. significant among these have been the expansion of global supply chains, the rapid growth of china, and the growth of the digital economy. the expansion of global supply chains has led to the outsourcing of labour - intensive stages of production to cheaper locations in emerging economies. to follow my earlier phone example, 2 / 12 bis central bankers'speeches apple has close to 123, 000 employees in the us, but over 700, 000 world - wide. the iphone is designed in the united states ; it uses components sourced from several countries including south korea, taiwan, and japan ; and is assembled in china. outsourcing and supply chain integration of this sort has lowered the price of a wide range of manufactures sold across the world ( figure 3 ). it has also placed downward pressure on the wages of lower skilled jobs in advanced economies. both have translated to less inflationary pressure in the advanced economies. a number of emerging economies have participated in the expansion of global supply chains. however, the huge scale and growth of china ’ s economy has had a profound effect. since joining the world trade organisation ( wto ) in 2001, china has quickly become the largest exporting nation in the world, with around 13 percent of merchandise exports and 18 per cent of manufacturing exports ( figure 4 ). apart from exports, china ’ s other main growth engine has been its high levels of investment which has contributed to excess capacity in some key sectors such as steel ( figure 5 ). this capacity expansion has had a restraining effect on prices of industrial materials and, in turn, a wide range of manufactured goods. 3 / 12 bis central bankers'speeches a third factor contributing to low global inflation is the rise of the digital economy. prices of ict goods and services ( information, communications and technology ) have fallen world - wide, as unit costs have fallen and supply has expanded. the falling price of ict globally has been reflected in new zealand cpi components ( figure 6 ), where prices of computing and telecommunication equipment and

organisations were focused on ensuring that essential economic activity could continue. this involved the maintenance of payments systems, including the supply of additional cash. we also focused on ensuring that key financial institutions were able to continue operations. after immediate safety factors were addressed, concerns shifted to ensuring the stability of business and economic activity. during this period, we have been focused on the soundness of the financial system, including the financial health of key economic organisations. we have also focused on providing appropriate support for economic activity. over time, cera and other organisations ’ response to these events will shift again as economic conditions in canterbury and the economy more generally improve. as this occurs, the reserve bank ’ s focus will move away from the provision of emergency support, and towards ensuring that the degree of economic stimulus provided is appropriate for achieving our medium - term policy aims. uncertainty about the state of the economy following the earthquakes has been very high. over the past year, we have been engaged in a process of ongoing learning about the state of the economy following the earthquakes that has fed into our policy deliberations. this process will continue for an extended period, even as the economy continues to recover, although our focus will gradually shift. the earthquake and financial system soundness cash handling and payments systems one of our most pressing concerns immediately following the earthquakes was the maintenance of payments systems. in the aftermath of events such as natural disasters, there is strong demand for food, water, petrol and other necessities. and with damage to bis central bankers ’ speeches power and telecommunications systems, access to cash is a key concern. only two hours after the february earthquake the reserve bank started receiving orders from banks for more cash for delivery to christchurch. ensuring cash was available required us to work closely with banks and cash in transit companies to meet the spike in demand. this task was complicated by damage to roads that meant travel, where possible in christchurch, was taking about three times as long as normal. the public also needed information about where cash was available. to ensure this, bank staff used google maps to provide a live feed of operational and accessible atms. overall about $ 150 million of extra cash was sent to christchurch in the week of the earthquake, representing about $ 350 per resident. there was a big drop in electronic payments and increased demand for cash, initially in the form of $ 20 and $ 50 notes through the surviving atm machines. we learned a lot about atm configuration to ensure operability, and the internet was very useful to provide