What this calculator does
The rate of return quoted on an investment, a savings account or a payrise is almost always the nominal rate: what the number grew by, in the currency of the day, with no adjustment for what that currency can actually buy. The real rate of return strips inflation back out, showing the growth in genuine purchasing power rather than in raw dollar terms.
This calculator uses the Fisher equation, real rate = ((1 + nominal) ÷ (1 + inflation)) − 1, rather than the shortcut of simply subtracting inflation from the nominal rate. The two give a similar answer at low rates, but diverge more than most people expect once either rate climbs, which the calculator shows alongside the proper result.
The formula
Both rates are converted to decimals, one plus the nominal rate is divided by one plus the inflation rate, and one is subtracted from the result. That figure, converted back to a percentage, is the real rate of return: the growth left over once the eroding effect of inflation on purchasing power is removed.
| Term | Meaning |
|---|---|
| Nominal rate | The stated rate of return, before any adjustment for inflation. |
| Inflation rate | The rate at which prices rose over the same period. |
| Real rate of return | The Fisher-equation result: ((1 + nominal) ÷ (1 + inflation)) − 1, the growth in actual purchasing power. |
The inputs explained
| Field | What to enter |
|---|---|
| Nominal rate of return (%) | The nominal rate of return you actually earned or were quoted, as a percentage. |
| Inflation rate (%) | The inflation rate over the same period, as a percentage. |
When to use it
Checking whether savings are actually growing
A savings account paying 3% sounds like growth, but against 4% inflation the real rate of return is negative: the balance buys less at the end of the year than it did at the start, even though the number on the statement went up.
Comparing investment returns across different eras
A 12% nominal return in a high-inflation decade is not directly comparable with an 8% nominal return in a low-inflation one. Converting both to real rates of return puts them on the same footing.
Assessing a payrise
The same Fisher equation applies to a wage increase against inflation: a 5% raise against 6% inflation is a real pay cut, even though the pay packet itself is larger.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How the real rate of return changes with inflation, at a fixed nominal return
A fixed 7% nominal rate of return, against a range of inflation rates.
| Inflation rate | Real rate of return | Simple approximation (nominal minus inflation) |
|---|---|---|
| 0% | 7.00% | 7.00% |
| 1% | 5.94% | 6.00% |
| 2% | 4.90% | 5.00% |
| 3% | 3.88% | 4.00% |
| 5% | 1.90% | 2.00% |
| 7% | 0.000% | 0.000% |
| 10% | -2.73% | -3.00% |
How the gap between the two methods widens at higher rates
A fixed 4% inflation rate, against a range of nominal returns.
| Nominal rate | Real rate of return | Simple approximation (nominal minus inflation) | Difference between the two methods |
|---|---|---|---|
| 2% | -1.92% | -2.00% | 0.077% |
| 5% | 0.962% | 1.00% | -0.038% |
| 8% | 3.85% | 4.00% | -0.154% |
| 12% | 7.69% | 8.00% | -0.308% |
| 18% | 13.5% | 14.0% | -0.538% |
| 25% | 20.2% | 21.0% | -0.808% |
Questions
What is the real rate of return formula?
Real rate = ((1 + nominal rate) ÷ (1 + inflation rate)) − 1, known as the Fisher equation. It is more accurate than simply subtracting the inflation rate from the nominal rate, particularly at higher rates.
Why not just subtract inflation from the nominal rate?
Subtracting is a widely used shortcut and is close enough at low single-digit rates, but it ignores the compounding interaction between the two rates. The Fisher equation accounts for that interaction directly, and this calculator shows both so the size of the gap is visible.
Can the real rate of return be negative even when the nominal rate is positive?
Yes, whenever inflation is higher than the nominal rate. The investment or account still grew in nominal terms, but that growth was smaller than the rate at which prices rose, so purchasing power fell.
Is this the same as the return calculated by the ROI or CAGR calculators?
No. The ROI calculator and CAGR calculator both report nominal returns, worked out from actual starting and ending values. This calculator takes a nominal rate you already have and adjusts it for inflation to get the real, purchasing-power rate.
To work out the nominal total or annualised return itself first, use the ROI calculator or the CAGR calculator, then bring the result here to adjust it for inflation.