for central banks. in a world in which central banks are managing fluctuations in aggregate demand with a relatively flat supply curve, the monetary response to demand shocks is relatively straightforward. life is more complicated in a world of supply shocks ; an adverse supply shock increases inflation and reduces output and employment. higher inflation calls for higher interest rates but lower output, and fewer jobs call for lower interest rates. it is likely that we will have to deal with this tension more frequently in the future. none of the developments that i have spoken about undermine our ability to achieve the inflation target on average, but they are likely to complicate the task. they also have implications for other areas of economic policy. as a country, we need to do what we can to make sure that the supply side of our own economy is flexible. in a world of more frequent supply shocks, we will be better off if there is flexibility in our labour and product markets so that we can respond quickly and effectively. this includes flexibility in terms of fiscal policy, which requires maintaining a strong underlying structural budget position. the productivity agenda is also important here. by becoming more productive we can lift our own ability to supply goods and services to the market. we have work to do here as a nation. over recent times, labour productivity growth has averaged a bit less than 1 per cent a year, which is slower than in previous decades ( graph 9 ). while, we can ’ t affect the international environment, we can affect our own ability to produce goods and services efficiently. doing what we can here is an important element in securing our own prosperity, and there has been no shortage of ideas in this regard. r e s e r v e b a n k o f au s t r a l i a graph 9 labour productivity * march 1993 = 100, log scale index 1993 – 2002 2003 – 2014 2015 – 2022 0. 9 % 1. 2 % index 2. 4 % * blue line denotes quarterly gdp per hour worked ; black lines denote linear trend ; labels show average annual growth. sources : abs ; rba monetary policy i would now like to turn back to here and now and the reserve bank board ’ s recent deliberations. at our meeting in early november we conducted a review of our experience with forward guidance about the cash rate during the pandemic and considered our approach going forward. that review was published last week and is available on our website. our policy package during the pandemic included being more specific

or older than 64 years relative to the number of people aged between 15 and 64 years inclusive ; dashed lines represent projections. sources : rba ; united nations the third important supply - side issue is climate change. globally, the frequency of extreme weather and climate events has increased over recent decades and it is likely that this trend will continue ( graph 7 ). [ 3 ] over the past 20 years, the number of major floods has doubled and the frequency of extreme heatwaves and droughts has also increased significantly. graph 7 extreme weather events globally no. 6, 000 no. flood storm extreme temperature drought wildfire 6, 000 4, 000 4, 000 2, 000 2, 000 1940 – 59 1960 – 1979 1980 – 99 sources : emergency events database ; rba r e s e r v e b a n k o f au s t r a l i a 2000 – 2019 these climate events disrupt production and they affect prices. we know this all too well in australia, where recent floods are one of the factors pushing inflation up at present. but it is not just food production that is affected by extreme weather. it also disrupts the production of commodities and the transport and logistics industries. these disruptions affect prices in global markets and it is likely that we will see more of these disruptions in the years ahead. the fourth supply - side factor that i want to highlight is the energy transition in the global economy. there is very significant investment in renewable energy around the world as we transition to green energy. but, at the same time, the existing capital stock that is used to produce energy is depreciating quickly, through decommissioning or lower levels of sustaining investment. it is difficult to make predictions here, but it ’ s probable that the global capital stock that is used to produce energy will come under recurring pressure in the years ahead. if so, we could expect higher and more volatile energy prices during the transition to a more renewables - based energy supply. in this context, it is interesting to compare the investment response in australia to the current boom in the terms of trade with that of a decade ago ( graph 8 ). in the earlier boom, higher commodity prices led to a surge in investment in the resources sector. this substantially added to australia ’ s capital stock and thus our ability to supply resources to the market. in contrast, the investment response this time has been negligible and there are few signs that firms are planning to increase supply in