Real Interest Rate Calculator
This calculator helps you determine the real interest rate by accounting for inflation, showing the true increase in purchasing power or the real cost of borrowing.
Enter the nominal interest rate (the stated rate) and the inflation rate to calculate the adjusted real interest rate.
Enter Interest Rate Details
Understanding Real Interest Rates
What is a Real Interest Rate?
The real interest rate adjusts the nominal interest rate for inflation, showing the true increase in purchasing power for investments or the real cost of borrowing. When inflation is positive, the real rate is typically lower than the nominal rate.
Real Interest Rate Formulas
Approximate Formula (Fisher Equation):
Real Rate ≈ Nominal Rate - Inflation Rate
This simple formula works well when rates are low.
Exact Formula:
1 + Real Rate = (1 + Nominal Rate) / (1 + Inflation Rate)
Then solved for Real Rate:
Real Rate = [(1 + Nominal Rate) / (1 + Inflation Rate)] - 1
This more precise formula should be used when inflation is high.
Key Concepts
- Positive Real Rate: Your money grows faster than prices rise (good for savers)
- Negative Real Rate: Prices rise faster than your money grows (bad for savers, good for borrowers)
- Zero Real Rate: Your money keeps pace with inflation
Example Calculation
If you have a savings account earning 5% (nominal) and inflation is 2%:
Approximate: 5% - 2% = 3% real return
Exact: (1.05/1.02) - 1 = 0.0294 → 2.94% real return
Real Interest Rate Examples
Click on an example to see the step-by-step calculation:
Example 1: Standard Savings Account
Scenario: Calculate the real return on a savings account with 3% interest when inflation is 1.5%.
1. Nominal Rate: 3%
2. Inflation Rate: 1.5%
3. Approximate Real Rate: 3% - 1.5% = 1.5%
4. Exact Real Rate: (1.03/1.015) - 1 ≈ 0.01478 → 1.478%
Conclusion: Your purchasing power grows by about 1.48% annually.
Example 2: High Inflation Environment
Scenario: A bond pays 8% but inflation is 6%. Find the real return.
1. Nominal Rate: 8%
2. Inflation Rate: 6%
3. Approximate Real Rate: 8% - 6% = 2%
4. Exact Real Rate: (1.08/1.06) - 1 ≈ 0.01887 → 1.887%
Conclusion: The exact real return is 1.89%, showing the approximation overestimates by 0.11%.
Example 3: Negative Real Rates
Scenario: A CD earns 0.5% when inflation is 2.5%.
1. Nominal Rate: 0.5%
2. Inflation Rate: 2.5%
3. Approximate Real Rate: 0.5% - 2.5% = -2%
4. Exact Real Rate: (1.005/1.025) - 1 ≈ -0.01951 → -1.951%
Conclusion: You're losing about 1.95% purchasing power annually.
Example 4: Mortgage During Deflation
Scenario: You have a 4% mortgage during 1% deflation (negative inflation).
1. Nominal Rate: 4%
2. Inflation Rate: -1%
3. Approximate Real Rate: 4% - (-1%) = 5%
4. Exact Real Rate: (1.04/0.99) - 1 ≈ 0.05051 → 5.051%
Conclusion: The real cost of your mortgage is about 5.05%.
Example 5: Business Loan Decision
Scenario: A business considers a 7% loan when inflation is expected to be 3%.
1. Nominal Rate: 7%
2. Inflation Rate: 3%
3. Approximate Real Rate: 7% - 3% = 4%
4. Exact Real Rate: (1.07/1.03) - 1 ≈ 0.03883 → 3.883%
Conclusion: The real cost of borrowing is about 3.88%.
Example 6: Treasury Bond Yield
Scenario: A 10-year Treasury yields 2.25% with expected inflation of 2%.
1. Nominal Rate: 2.25%
2. Inflation Rate: 2%
3. Approximate Real Rate: 2.25% - 2% = 0.25%
4. Exact Real Rate: (1.0225/1.02) - 1 ≈ 0.00245 → 0.245%
Conclusion: The real yield is just 0.245%, barely positive.
Example 7: High-Yield Savings
Scenario: A high-yield account offers 4.5% with inflation at 3.1%.
1. Nominal Rate: 4.5%
2. Inflation Rate: 3.1%
3. Approximate Real Rate: 4.5% - 3.1% = 1.4%
4. Exact Real Rate: (1.045/1.031) - 1 ≈ 0.01358 → 1.358%
Conclusion: The account provides a 1.36% real return.
Example 8: Credit Card Debt
Scenario: Credit card charges 18% APR with 5% inflation.
1. Nominal Rate: 18%
2. Inflation Rate: 5%
3. Approximate Real Rate: 18% - 5% = 13%
4. Exact Real Rate: (1.18/1.05) - 1 ≈ 0.1238 → 12.38%
Conclusion: The real cost is still very high at 12.38%.
Example 9: Hyperinflation Scenario
Scenario: A loan has 150% interest during 120% inflation.
1. Nominal Rate: 150%
2. Inflation Rate: 120%
3. Approximate Real Rate: 150% - 120% = 30%
4. Exact Real Rate: (2.5/2.2) - 1 ≈ 0.1364 → 13.64%
Conclusion: The approximation is very inaccurate here (30% vs actual 13.64%).
Example 10: Zero Nominal Rate
Scenario: Savings account pays 0% with 1.8% inflation.
1. Nominal Rate: 0%
2. Inflation Rate: 1.8%
3. Approximate Real Rate: 0% - 1.8% = -1.8%
4. Exact Real Rate: (1/1.018) - 1 ≈ -0.01768 → -1.768%
Conclusion: You're losing about 1.77% purchasing power annually.
Frequently Asked Questions about Real Interest Rates
1. Why calculate the real interest rate?
The real rate shows your true financial position by accounting for inflation's erosion of purchasing power. A 5% return isn't good if inflation is 6% (real return = -1%).
2. When should I use the exact formula vs approximation?
Use the exact formula when inflation exceeds 5% or for precise calculations. The approximation works fine for low rates (under 5%).
3. Can the real interest rate be negative?
Yes, when inflation exceeds the nominal rate. This means your money loses purchasing power over time.
4. How does deflation affect real rates?
Deflation (negative inflation) makes real rates higher than nominal rates. A 2% nominal rate during 1% deflation gives a ~3% real return.
5. What's a good real interest rate for savings?
Historically, 1-3% real return is reasonable. Positive real rates grow your purchasing power.
6. How do central banks use real rates?
Central banks monitor real rates to set monetary policy. Negative real rates encourage borrowing/spending; positive rates encourage saving.
7. Why might someone accept negative real rates?
For safety (bank accounts), or if they expect even worse alternatives (like currency devaluation).
8. How often should I recalculate real rates?
Whenever inflation expectations change significantly, or at least annually for long-term investments.
9. Do taxes affect real returns?
Yes! Taxable accounts face "taxflation" - you pay taxes on nominal gains, further reducing real returns.
10. Where can I find inflation rate data?
Government sources like the U.S. Bureau of Labor Statistics (CPI) or central banks provide inflation data.
