that accounting for observed inflation in our models helps us to better explain inflation. this is likely to reflect – among other things – that following a period of high ( or low ) inflation, some prices may need to adjust by more ( or less ) to restore relative prices to equilibrium. contracts and government policies that index charges to inflation also contribute to this persistence. reflecting this, we often model this part of the price - setting process using a moving average of past inflation, with more weight on the recent past than on the distant past. our approach implied that the recent bout of high inflation would be embedded in firms ’ price - setting decisions for years to come. but is this a good assumption in all conditions? at the time of our recent august monetary policy statement, we altered our price - setting assumptions so that they adapt more quickly to a low inflation environment. this is a judgement that we have had to make with perspective, empathy and courage. the outcome was material to our policy decision in august, giving us more confidence to reduce our policy interest rate. other changes in pricing behaviour are equally challenging to model. for example, it ’ s possible that firms ’ price - setting behaviour has been ‘ scarred ’ by the recent period of high inflation. but it could also normalise more quickly. there is evidence to suggest that people ( businesses and households ) pay more attention to the state of the economy when inflation is high and volatile. by contrast, when inflation is low and stable, people have less to gain from understanding the nuances of the inflation outlook as they often have better things to do. this is coined ‘ rational inattention ’. 11 firms also adjust prices more frequently when inflation is high as it becomes more costly not to keep up. 12 alan blinder famously remarked that price stability is when “ ordinary people in their ordinary course of business are not thinking and worrying about inflation ”. 13 _ _ _ _ _ _ _ _ _ _ _ _ 11 we observe ‘ rational inattention ’ in survey data of new zealand households ( bayarmagnai, 2023 ). 12 this dynamic is influenced by rigidities arising from menu costs and strategic complementarities in firms ’ pricing decisions. 13 blinder ( 1995 ). these dynamics give us reason to assume that price - setting behaviour may normalise quickly as we return to a low inflation environment. rationally, attention will go elsewhere. implications for the mpc ’ s monetary policy strategy in new zealand, uncertainties about firms ’ price

around the world, to talk about the challenges we have in common, and the ones we don ’ t share but can learn from. there ’ s never a shortage of emerging issues and perennial challenges to talk about. new means of assessing our current economic position, better means of forecasting ahead, improved strategies for managing through uncertainty, and shared experiences of communicating with confidence during uncertain and unpleasant times – keeping focused on our goals. i take great comfort from what i see and hear. as monetary policy decision makers we have retained clear goals – primarily focused on achieving and maintaining low and stable inflation. this helped central banks guide monetary policy through a period of extreme conditions. we retained confidence in ‘ visualising the island ’ – or our goal of restoring low and stable inflation. _ _ _ _ _ _ _ _ _ _ _ _ 1 in maori oral history and storytelling ‘ hawaiki ’ refers to the original home of the first inhabitants of aotearoa. 2 like all good stories told over centuries, accounts differ. for example, by some accounts kupe had initially set out to slay an octopus te wheke - o - muturangi, who had been stealing bait from the fishermen ’ s lines. by other accounts, kupe had set out to discover new land, perhaps having observed the pipiwharauroa – migratory birds that would fly off into the ocean horizon every year – or the whales that would journey south and then return. we also know that polynesian navigators had ways to place themselves within the expanse of the ocean. with no gps, they used the stars, they looked for the presence of certain fish and bird species, and they observed patterns in the waves and reflections on the clouds. but, far away from landmarks and reefs, no one method could tell them exactly where they were. crowe ( 2018 ) discusses the voyaging achievements of maori and their polynesian ancestors. retaining this confidence is critical given the significant time between making our policy decision and seeing its full effect on inflation. our inflation goal is always 1 to 2 years ahead, that is, over the horizon. at the reserve bank of new zealand, this future focus is coded into our monetary policy remit, which tasks us with targeting future inflation over the medium term. globally, we have been able to rely on robust monetary policy tools and decision - making frameworks, built upon years of research and experience, and have many bright minds to advise us. advanced economy central banks are