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Real interest rate

The real interest rate is the rate adjusted for inflation, showing how much purchasing power actually grows. If nominal interest is lower than inflation, the real rate is negative — the money grows in currency but loses purchasing power.

1 + r_{\text{real}} = \frac{1 + r_{\text{nom}}}{1 + i}

relation between nominal rate, inflation and real rate

Symbols

$r_{\text{nom}}$	nominal interest rate
$i$	inflation
$r_{\text{real}}$	real interest rate

Example

Nominal rate 6%, inflation 2%:

$r_{\text{real}} = 1.06/1.02 - 1 \approx 3.92\%$ .

A simple approximation is

r_{\text{real}} \approx r_{\text{nom}} - i

, but the exact formula uses the ratio.

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Part of Engineering Economics: Interest and time value.