How this calculator works
A nominal rate tells you how fast the dollar balance grows; a real rate tells you how fast its purchasing power grows. If a savings account pays 5% while prices rise 2%, a dollar becomes $1.05 but each dollar buys about 2% less, so purchasing power rises by roughly 2.94%. For borrowers the same arithmetic applies in reverse: the real cost of a loan is the nominal rate less the inflation that erodes the value of the money repaid. The calculation assumes inflation over the same period as the rate and uses expected inflation when the choice is being made in advance.
Formula
Real interest rate = (1 + nominal rate) / (1 + inflation rate) - 1. Rearranged, nominal rate = (1 + real rate) × (1 + inflation rate) - 1 and inflation rate = (1 + nominal rate) / (1 + real rate) - 1. The growth in purchasing power per dollar is 1 + real rate.
Worked example
A nominal rate of 5% with 2% inflation gives a real rate of 2.9412%. One dollar of principal grows to $1.05 in nominal terms, which buys as much as $1.029412 did at the start, so purchasing power rises by 2.9412%.
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Frequently asked questions
Does inflation help or hurt a borrower?
Unexpected inflation helps a borrower with a fixed-rate loan, because the money repaid is worth less than expected. Expected inflation is normally built into the nominal rate, so it is the surprise component that redistributes between borrower and lender.
Which inflation measure should I use?
Match the measure to the spending you care about. A national consumer price index suits household purchasing power, while a broader or narrower index may be better for a specific goal.
Can the real rate be negative?
Yes. When the nominal rate is below inflation, savers lose purchasing power. That happened in several countries during periods of very low interest rates and higher inflation.