and equipment ( graph 4 ). this is largely, but not solely, driven by technology improvements lowering the price of computing power. but again, just as is the case for consumer goods, the decline in the relative price of machinery and equipment has been unusually large over the past decade. the exchange rate has obviously played an important role here as well. and the lower prices for investment goods have helped make investment more attractive in a number of areas of the australian economy. bis central bankers ’ speeches graph 4 the third set of relative prices that i would like to talk about are those that relate to the price of labour. for workers, what matters is the wage that is received relative to the price of the goods and services that they purchase – the so - called real consumption wage. for firms, what matters is the wage they pay, relative to the price of the goods and services that they sell – the so - called real product wage. normally, at least at the aggregate level, these two are pretty similar, since there is a close correspondence between the goods and services that people buy and the goods and services that firms produce. over recent years, however, this correspondence has broken down as the improvement in the terms of trade has increased the price at which aggregate output is sold relative to the price of consumption ( graph 5 ). since 2000, the economy - wide real consumption wage has increased by around 25 per cent, which represents a substantial increase in the purchasing power of the average wage. in contrast, over the same period, the aggregate real producer wage has increased by only around 10 per cent. this relatively modest increase in the cost of hiring labour relative to the price at which aggregate output is sold has helped underpin strong employment growth. it has also contributed to an increase in the aggregate profit share of national output, which is currently around its highest level in the past 50 years ( graph 6 ). the relatively modest growth in the aggregate producer wage is also consistent with the slowing in aggregate labour productivity growth, as firms have been willing to hire more labour than would otherwise have been the case. bis central bankers ’ speeches graph 5 graph 6 while this aggregate picture is pretty clear, it hides very significant differences across industries ( graph 7 ). these differences largely arise because of differences in productivity growth across industries as well as movements in world prices. in industries with relatively bis central bankers ’ speeches fast productivity growth, real product wages tend to rise over time, as the productivity growth puts downward pressures on prices relative to

. the most important contribution the reserve bank can make to this task is to keep inflation low and stable, so that firms can respond to the shift in relative prices without their decisions being distorted by concerns about inflation in the general level of prices. the inflation targeting regime that we have had for nearly two decades provides the right framework to do this. finally, in thinking about the implications of the recent changes in relative prices an important consideration is how persistent they are likely to be. there would seem to be little benefit in changing the structure of the economy to reflect the new relative prices, only for the old set of relative prices to reassert themselves quite quickly. as the governor noted in a speech a couple of weeks ago, we cannot be sure how long the current boom in the terms of trade will last. however, given that it is being driven by structural changes in the global economy, it is likely that commodity prices will be above their average over recent decades for some time yet. if this is the case, australia will do very well. history, however, does suggest caution and we cannot be sure what the future will hold. the best way of dealing with this uncertainty is to make sure that the economy retains its flexibility to deal with whatever set of relative prices the global economy delivers us. bis central bankers ’ speeches