How the real interest rate is calculated
The nominal rate is the rate you see quoted, including the effect of inflation. The real rate strips inflation out, showing your actual purchasing-power return. The Fisher equation is the standard formula for this.
- nominal rate — the quoted rate, including inflation (%)
- inflation rate — the price inflation rate over the same period (%)
- real rate — the purchasing-power-adjusted rate (%)
More detail
Exact vs. approximate formula
When both rates are low single digits, the approximation (nominal − inflation) is close to the exact formula, but the gap widens as either value grows. At 5% nominal and 2% inflation, the approximation gives 3.00% while the exact formula gives about 2.94% — a 0.06 point difference.
Why the real rate matters
If your savings rate is lower than inflation, the real rate turns negative — you earn nominal interest but still lose purchasing power. Compare investment or savings products by their real rate, not their nominal rate.
Good to know. Inflation rate is usually taken from official consumer price index (CPI) figures. If expected and actual inflation differ, the real rate you experience after the fact will differ too.
Frequently asked questions
What's the difference between nominal and real interest rate?
The nominal rate is the quoted rate including inflation's effect; the real rate strips inflation out to show how much your money actually grows in purchasing power. Plugging your nominal rate and inflation rate above into the Fisher equation (1+real)=(1+nominal)/(1+inflation) gives the exact real rate.
Should I use the exact or approximate formula?
When both rates are low single-digit percentages, the approximation (nominal − inflation) is close enough, but for precision use the exact formula (1+nominal)/(1+inflation)−1. At 5% nominal and 2% inflation the approximation gives 3.00% while the exact formula gives about 2.94% — a real difference.
Can the real interest rate be negative?
Yes. If inflation exceeds the nominal rate, the real rate goes negative — for example, 0% nominal with 5% inflation gives an exact real rate of about -4.76%, meaning your money loses purchasing power even though it earns no negative interest.
Why does -100% inflation break the calculation?
The Fisher equation's denominator (1 + inflation rate) must stay above zero for the division to make sense. Enter an inflation rate at or below -100% and the calculator shows "—" instead of a result.