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Expansion is one of the major macro-economic issues which determine the better functioning of the economy. Additionally, it leads a multi-dimensional effect on the overall social, economic, financial, mechanical and political affairs of the country. To come with this problem, the study focuses on the identification and assessment of variables which determine the rate of inflation in Ethiopia using annual data from the year 1985 to 2018. The study used secondary time series data and applies econometric analysis to identify significant variables in determining inflation both in the long run and short run and descriptive methods of data analysis to identify the trend of inflation and money supply. The finding of this study shows that real interest rate and real effective exchange rate are significant in determining inflation both in the short run and long run. Broad money supply determines inflation only in the long run and gross domestic saving doesn’t determine the rate of inflation both in the long run and short run. The monetary base of the country which is broad money supply has some dispersion or different impact in determining inflation. It has significant impact in the long run but became statistically insignificant in the short run since monetary policy has higher outside lag and needs longer time to affect inflation after increasing money supply. So it is advisable to the policy makers to find the right balances whether money supply permanently determines inflation rate or it is insignificance in both short run and long run models.
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