The formulas
- 1 + nominal = (1 + real) x (1 + inflation)
- Real = (1 + nominal) / (1 + inflation) - 1
- After-tax real = (1 + nominal x (1 - tax)) / (1 + inflation) - 1
How it works
The Fisher equation links nominal rates, real rates and inflation. The exact form divides one plus the nominal rate by one plus inflation. The shortcut, nominal minus inflation, is close at low rates and drifts as rates rise.
Tax falls on the full nominal interest, including the part that only keeps pace with inflation. That is why the after-tax real rate can be near zero or negative even when the pre-tax real rate is positive.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Which inflation figure should I use?
Expected inflation over the holding period for planning, or realized CPI change for a look back.
When does the shortcut break down?
At high rates. At 20% nominal and 15% inflation the exact real rate is 4.35%, not 5%.
Can the real rate be negative?
Yes, whenever inflation exceeds the nominal rate.
Formulas on this page are the standard definitions.
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