In addition to the nRF Connect SDK Toolchain package, you need an installation of the nRF Command Line Tools to interact with Nordic Semiconductor's devices. While these tools are available on the Nordic Semiconductor's website and they are bundled with nRF Connect for Desktop, it is easy to miss them when approaching the nRF Connect SDK from VS Code.
The extension will now look for a valid and up-to-date installation of the nRF Command Line Tools on startup, and provide an option for installing the newest version directly from VS Code.
Whenever there's a new release of the nRF Command Line Tools, the extension will let you know through its Status Bar item in the bottom right of the VS Code window.