years. simply plotting the unemployment and inflation data ( figure 8 ), it can be observed that there is now less inflation for a given level of unemployment and less apparent responsiveness of inflation to changes in unemployment. however, it is also clear that the overall relationship between unemployment and inflation has been quite weak and that other causal factors, both international and domestic, have been playing an important role. 5 6 / 12 bis central bankers'speeches source : stats nz, rbnz. chart excludes volatile cpi observations affected by the new zealand gst increase in 2010. the measurement of economic slack is becoming more difficult. total potential output – or capacity – is not directly observable and it may be that the increasing flexibility and mobility of labour is causing us to understate our measures of capacity. we will increasingly need to refer to a range of labour market indicators in addition to unemployment when assessing the extent of slack in the labour market. there is not much doubt that an increase in international labour mobility has also affected wage inflation in new zealand. in some of the traditional non - traded sectors like construction there is now greater scope for employers to meet skill shortages through international hires, even though recent stretch in the construction industry has seen wage costs increasing for certain occupations and skills. on a national scale, we have experienced ongoing high levels of inward migration. over the past 3 years, the population has grown by around 6 percent, of which less than a third is from natural growth. an increasing share of the inward migration has been on work visas ( figure 9 ), thus contributing to higher productive capacity. in this way, emerging excess demand for labour has been moderated on the supply side as a result of increased international labour mobility. 7 / 12 bis central bankers'speeches with the new zealand economy becoming generally more integrated with the global economy, we are likely to see less variability in measures of economic slack and also less variability in labour costs, consistent with a flattening of the philips curve. new zealand has always been a price taker for goods traded in the international markets. it now appears that, with labour mobility and globalisation effects, we are increasingly a price taker in “ non - traded ” goods and services ( figure 10 ). for example, suppliers of education and tourism services are now operating in increasingly competitive international markets. they are facing international competition for their services and also for their labour inputs. both sectors have been growing as a share of gdp. 8 / 12 bis central bankers'speeches

grant spencer : low inflation and its implications for monetary policy speech by mr grant spencer, deputy governor of the reserve bank of new zealand, to the institute of directors, auckland, 5 december 2017. * * * thank you to the institute of directors for inviting me to speak here in auckland. today i will discuss the low inflation environment we are experiencing here in new zealand and in many other countries. to start, i would like you to think about the mobile phone in your pocket, because it represents some of the global trends i will refer to. it is a symbol of how manufacturing has become global, how costs of production have been lowered, particularly for technology - based goods and services, and how we are now connected to global markets through digital devices and the internet. these are themes i will return to. since the global financial crisis in 2008 we have seen persistently low inflation both internationally and at home. inflation has surprised on the downside relative to forecasts from economic models ( figure 1 ). and it has persisted in recent years despite falling unemployment rates here and in most of the advanced economies. this global pattern is depicted in figure 2. 1 / 12 bis central bankers'speeches source : oecd, rbnz calculations. scatter plot shows 2017 data1 in response to very weak activity and low inflation following the gfc, many central banks allowed their policy interest rates to fall to zero and below, and injected significant stimulus through quantitative easing. despite the persistent application of very easy monetary policy and a recovery of demand in the major economies, inflation has been slow to move up towards central bank targets ( typically 2 percent p. a. ) in new zealand we avoided zero policy interest rates and quantitative easing, but have also maintained a very easy monetary policy stance since the gfc. if this low inflation is a global phenomenon, we need to consider global factors to understand the potential causes. in the initial post - gfc period, the clear common driver was weak demand as households and firms restricted spending and consolidated their positions in the wake of severe financial stress. however, with the persistence of low inflation as activity recovered, we also need to consider broader supply - side factors, such as the changing pattern of production across the world and the impact of digital technology. we need to consider how these global factors and also domestic developments might be affecting the shape of the new zealand economy and the pricing behaviour of individuals and firms. i will first talk about some of the key global supply - side trends that have