Methylation of CG dinucleotides (mCGs), which regulates eukaryotic genome functions, is epigenetically propagated by Dnmt1/MET1 methyltransferases. However, how mCG is established and transmitted across generations despite imperfect enzyme fidelity is unclear. Whether mCG variation in natural populations is governed by genetic or epigenetic inheritance also remains mysterious. Here, we show that MET1 de novo activity, which is enhanced by existing proximate methylation, seeds and stabilizes mCG in Arabidopsis thaliana genes. MET1 activity is restricted by active demethylation and suppressed by histone variants, producing localized mCG patterns. Based on these observations, we develop a stochastic mathematical model that precisely recapitulates mCG inheritance dynamics and predicts intragenic mCG patterns and their population-scale variation given only CG site spacing. Our results demonstrate that intragenic mCG establishment, inheritance, and variance constitute a unified epigenetic process, revealing that intragenic mCG undergoes large, millennia-long epigenetic fluctuations and can therefore mediate evolution on this timescale.