Real interest rate
Real interest rate is the nominal rate adjusted for inflation, linked by (1 + nominal) = (1 + real)(1 + inflation); it measures true growth in purchasing power.
FrameworkFisher equation
See it move
A deposit pays a nominal rate of 8% while inflation runs at 3%. The exact Fisher formula gives a real rate of (1.08 ÷ 1.03) − 1 ≈ 4.85%. The common shortcut, simply subtracting, gives 8% − 3% = 5.00% instead — close, but not exact, because it ignores the compounding between the two rates.
The formula
Variables
- Real interest rate (decimal)
- Nominal interest rate (decimal)
- Inflation rate (decimal)
The exact real interest rate implied by a nominal rate i and an inflation rate π, derived from the Fisher equation (1+i) = (1+r)(1+\pi).
Check yourself
A savings account pays a nominal interest rate of 6% while inflation is 2%. Using the exact Fisher relationship, what is the real interest rate (to two decimal places)?