Real interest rate calculator
Enter a nominal interest rate and an inflation rate to get the real rate by the exact Fisher equation, next to the subtraction most people use, so you can see when the shortcut stops being safe.
Real interest rate: 3.77%
The shortcut, nominal minus inflation, gives 4.00%. The gap between the two is 0.23 points, and it widens as inflation rises.
For real policyrates, we publish every country's policy rate less its latest inflation print, ranked, on the real-rate carry screen. The latest inflation prints themselves are on inflation by country.
Questions
What is the real interest rate formula?
Real rate = (1 + nominal rate) ÷ (1 + inflation) − 1, with both rates as decimals. This is the Fisher equation. A 10% nominal rate with 6% inflation is a real rate of 1.10 ÷ 1.06 − 1 = 3.77%.
Why not just subtract inflation from the nominal rate?
Subtraction is an approximation that only holds when both rates are small. At a 5% rate and 2% inflation it says 3.00% against a true 2.94%. At a 40% rate and 35% inflation it says 5.00% against a true 3.70%. In a high-inflation country the shortcut overstates the real return by a point or more.
What does a negative real interest rate mean?
Inflation is higher than the nominal rate, so money held at that rate buys less at the end of the year than at the start. A central bank holding its policy rate below inflation is running a negative real policy rate, which stimulates the economy and, if it lasts, tends to weaken the currency.
Which inflation rate should I use?
For what a rate earned over the past year, use the latest year-over-year inflation print. That gives the ex-post real rate. For a decision about the year ahead, expected inflation is the right input, giving the ex-ante real rate, but expectations have to come from a survey, a forecast or market prices.