6 june 2010 report - 6 september 2010 report ( * ) gray area shows forecast as from the third quarter of 2010. source : central bank of chile. table 2 economic growth and inflation ( annual change, percent ) 2010 ( f ) 2011 ( f ) gdp domestic demand domestic demand ( w / o inventory change ) gross fixed capital formation total consumption goods and services exports goods and services imports current account ( % of gdp ) 3, 7 7, 6 7, 5 18, 6 4, 0 3, 1 12, 2 - 1, 5 - 1, 5 - 5, 9 - 2, 8 - 15, 3 1, 8 - 5, 6 - 14, 3 2, 6 5. 0 - 5. 5 16, 1 11, 3 21, 2 8, 3 - 0, 3 26, 3 - 1, 1 5. 5 - 6. 5 6, 2 7, 4 13, 6 5, 3 6, 1 6, 4 - 2, 5 average cpi inflation december cpi inflation cpi inflation in around 2 years ( * ) 8, 7 7, 1 1, 6 - 1, 4 1, 7 3, 9 3, 3 3, 2 average cpix inflation december cpix inflation cpix inflation in around 2 years ( * ) 8, 4 8, 6 2, 8 - 1, 8 0, 8 3, 5 3, 6 3, 5 average cpix1 inflation december cpix1 inflation cpix1 inflation in around 2 years ( * ) 7, 8 7, 7 2, 8 - 1, 1 - 0, 3 1, 5 3, 0 3, 2 2012 ( f ) 3, 0 3, 1 3, 0 ( f ) forecast. ( * ) inflation forecast to the third quarter of 2012. source : central bank of chile. figure 8 national figure 9 employment and unemployment rate ( percent ; millions of ( * ) persons ) rate real exchange ( index, 1986 = 100 ) universidad de chile ( * ) 2, 8 2, 6 2, 4 2, 2 2, 0 1, 8 03 04 05 06 07 08 09 10 rer average 1990 - 1999 unemployment rate ine ( * ) the dot shows the real exchange rate as of 6 september 2010. employment 7, 5 7, 0 6, 5 6, 0 5, 5 mar. 09 ago. 09 ene. 10 jun. 10 5, 0 average 1995 - 2009 unemployment rate employment source : central bank of chile. ( *

in the inflation process. that is, inflation is often initially transmitted from labor market excess demand to wage change and then to price change. this third principle may be especially important today because, in my view, there is an important disparity between the balance between supply and demand in the labor and product markets, with at least a hint of excess demand in labor markets, but very little to suggest such imbalance in product markets. it is important to understand that the phillips curve is a model of inflation dynamics, not a model that determines the equilibrium inflation rate. for this reason, the phillips curve paradigm is not at all inconsistent with the view that inflation is, in the long run, exclusively a monetary phenomenon. perhaps the easiest way to appreciate this is to recall that the long - run phillips curve is widely understood to be vertical. in other words, nairu is consistent with any constant rate of inflation, including zero. the phillips curve therefore cannot determine inflation in the long run because it is consistent with any constant rate of inflation. what does determine the rate of inflation in the long run? the rate of money growth, of course, though one needs to assume a stable money demand function to get a stable relationship between money growth and inflation. what does the phillips curve explain, if not the long - run level of inflation? the answer is that it explains the dynamics of the inflation process, how the economy evolves from one inflation rate to another, for example, in response to an increase in the rate of money growth. the dynamics of changes in inflation operate through excess demand in labor and / or product markets. thus the phillips curve indicates that, if the unemployment rate is maintained at a level below nairu, inflation increases over time, progressively and indefinitely. the initial source of an increase in inflation can be anything which produces excess demand in labor and output markets. it could also be a supply shock, but i am ignoring this possibility so i can focus exclusively on the implications of the current strength in aggregate demand. under an interest rate operating procedure, an increase in aggregate demand which increases output, utilization rates, and, ultimately, inflation will itself generate an increase in the money supply to support the higher nominal income. money is not pinned down in such a regime, but passively adjusts to changes in nominal income. despite the sharpness and force of the phillips curve / nairu model, it can be difficult to implement in practice. still, this relationship was about the most stable tool in the