How is inflation rate of a country decided?

Question

The economic position of a country is said to be stable when the inflation of essential goods are kept at a lower level. how is this level maintained.

Answer 1

Price stability is maintained through predictably stable growth of the country's money supply.  You see, money is a commodity just like anything else except that the government controls how much of it there is.  When the supply of money increases by too much then money is less scarce relative to other goods and the money price of goods increases (i.e. the county experiences inflation).

Answer 2

There is this index called the Consumer Price Index (CPI) it is the price of a basket of market goods.  Every so often (possibly quaterly) a new CPI comes out.  Inflation is determined by comparing these CPIs.  For example, if two bananas, three apples, and five oranges cost $10 in 2007, and the same fruits are bought in 2008 and they cost $15, then it's obvious that inflation has occured and can be calculated.  The government is in charge of fiscal policy (government taxing and spending policies) and the Federal Reserve (Fed) is in charge of monetary policy which affects the money supply.  The government's taxing and spending policies can affect inflation by shifting the Aggregate Demand curve to the left or to the right.  The Fed can increase or decrease the money supply through various methods, although the biggest is open market operations (buying and selling bonds on the open market).  An increase in the money supply will increase inflation and decrease unemployment, where a decrease in the money supply should decrease inflation and increase unemployment.  It's a double-edged sword.  The government and the Fed work together to keep stable prices while keeping a healthy rate of growth.  Hope this helps.