Real Interest Rate Calculator
Enter the nominal interest rate and the expected inflation rate to see the real interest rate, the rate left after inflation.
Updated
Real Interest Rate Calculator
Our Real Interest Rate Calculator shows what an interest rate is worth once rising prices are taken out. Type the nominal (quoted) interest rate and the inflation rate you expect, both as percentages. It returns the real interest rate, the exact compounded version of the same rate, the real gain or loss on every 1,000 over a year, and whether the rate favours savers or borrowers. A bar shows how much of the quoted rate is real and how much only replaces lost buying power. It suits savers comparing accounts, borrowers judging the true cost of a loan, investors, and economics students.
Quick answer
The real interest rate = nominal interest rate − inflation rate: with a nominal rate of 6% and inflation of 2.5%, 6% − 2.5% = 3.5%.
- Positive: money saved or lent gains buying power.
- Negative: inflation is higher than the rate, so savings buy less each year.
- Zero: interest only replaces what inflation takes away.
- Exact version: (1 + nominal) ÷ (1 + inflation) − 1, about 3.4146% for the same inputs.
What Is the Real Interest Rate?
The real interest rate is the interest rate after inflation has been taken out. The rate a bank or lender quotes is the nominal rate. It tells you how fast the amount of money grows. The real rate tells you how fast the amount of goods and services that money can buy grows.
Put 1,000 in an account paying 6% and a year later you have 1,060. If prices rose 2.5% in that year, a basket of goods that cost 1,000 now costs 1,025. Your money grew by 6%, but your buying power grew by only about 3.5%. That 3.5% is the real interest rate.
Real Interest Rate Formula
= nominal rate − inflation rate
In symbols:
- r: the real interest rate, in percent.
- i: the nominal interest rate, the rate quoted on the account, loan or bond.
- πe: the expected inflation rate over the same period.
Both rates must cover the same length of time, normally one year. The answer is in percentage points.
How to Calculate the Real Interest Rate
A savings bond pays a nominal rate of 6% a year and you expect inflation of 2.5% a year:
= 3.5%
- Find the nominal rate. The bond quotes 6% a year.
- Find the inflation rate for the same period. You expect prices to rise 2.5% a year.
- Subtract. 6 − 2.5 = 3.5, so the real interest rate is 3.5%.
On 1,000 that is a real gain of about 35 in a year: the other 25 of the 60 in interest only keeps up with prices.
How Inflation Eats the Real Rate
Hold the nominal rate at 6% and let inflation change. At 2.5% inflation the real rate is 3.5%. At 6% inflation the two cancel out and the real rate is zero. Past that point the real rate is negative: the money in the account grows, but it buys less every year.
Positive, Zero and Negative Real Rates
The sign of the real rate matters more than its size:
| Nominal, inflation | Real rate | Buying power |
|---|---|---|
| 5%, 2% | 3% | Grows |
| 3%, 3% | 0% | Flat |
| 1%, 4% | −3% | Shrinks |
A negative real interest rate does not mean the bank takes money out of your account. The balance still rises by the nominal rate. It means prices rise faster, so the larger balance buys less than the smaller one did a year earlier.
What the Real Rate Means for Savers and Borrowers
- Savers and lenders want a high real rate. It is their true reward for waiting. A savings account paying 4.25% with 3% inflation earns a real 1.25%.
- Borrowers want a low real rate. It is the true cost of the loan. A fixed mortgage at 6.5% with 2% inflation costs a real 4.5% a year, about 9,000 on a 200,000 balance.
- When the real rate is negative, borrowers gain and savers lose: the debt is repaid with money that is worth less than the money that was borrowed.
- Surprise inflation moves wealth from lenders to borrowers on fixed-rate loans, because the rate was set for a lower inflation rate than the one that arrived.
The calculator shows which side the rate favours in the Favours row.
After-Tax Real Interest Rate
Tax is normally charged on the nominal interest, not on the real interest, so the rate you keep is lower still:
= i × (1 − tax rate) − inflation
With a nominal rate of 6%, a tax rate of 25% on interest and inflation of 2.5%:
= 4.5% − 2.5%
= 2%
To get this from the calculator, enter the after-tax rate (4.5) as the nominal rate. Tax rules differ by country and by type of account, so check the rate that applies to you.
Real Interest Rate Examples
A savings account. The account pays 4.25% and inflation is expected to be 3%:
On a balance of 5,000 that is a real gain of about 62.50 over the year.
A negative real rate. A deposit pays 2% while inflation runs at 7%:
Falling prices. A bond yields 1.5% and prices are expected to fall by 1%. Enter −1 for inflation:
Deflation adds to the real rate, which is why even a low nominal rate can be a heavy burden for borrowers when prices fall.
Where to Find the Two Rates
| Input | Where to look |
|---|---|
| Nominal rate | The yearly rate quoted on the account or loan, a bond yield, or the central bank policy rate. |
| Expected inflation | A central bank inflation target or forecast, a survey of expectations, or the gap between ordinary and inflation-linked bond yields. |
| Past inflation | The yearly change in the consumer price index (CPI), used to measure what a past period really earned. |
Use expected inflation when you are deciding about the future, such as choosing a savings account or a fixed-rate loan. Use actual inflation when you look back at a period that has ended. Inflation-linked bonds, such as TIPS in the United States, quote a real yield directly, so no subtraction is needed for them.
Simple vs Exact Real Interest Rate
Subtracting is a close estimate. The exact real rate divides the two growth factors, because interest and prices both compound:
| i, π | Simple | Exact |
|---|---|---|
| 6%, 2.5% | 3.5% | 3.4146% |
| 12%, 8% | 4% | 3.7037% |
| 30%, 25% | 5% | 4% |
At everyday rates the two differ by less than a tenth of a point, so the simple formula is the one most textbooks and news reports use. The calculator shows the exact figure in the row below the main answer. For the full derivation, see our Fisher Equation Calculator, and for the theory of how nominal rates follow inflation, see the Fisher Effect Calculator. To adjust an investment return instead of an interest rate, use the Real Rate of Return Calculator.
Why Economists Watch the Real Rate
- Spending and investment decisions depend on the real cost of borrowing, not the quoted rate. A 9% loan is cheap with 8% inflation and costly with 1%.
- Central banks judge how tight their policy is by the real policy rate: the policy rate minus inflation. A rate rise that is smaller than the rise in inflation leaves real rates lower than before.
- Comparing countries or decades only makes sense in real terms. A 10% rate in a high-inflation economy can reward savers less than a 3% rate in a low-inflation one.
The result is for education and planning and is not financial advice.
Key Terms
- Nominal rate
- The quoted interest rate, in money terms.
- Real rate
- The interest rate after inflation is removed.
- Inflation
- The yearly rise in the general level of prices.
- Deflation
- A fall in prices, entered as negative inflation.
- Buying power
- The goods and services an amount of money buys.
- Real policy rate
- A central bank rate minus inflation.
How to Use the Real Interest Rate Calculator
- Enter the nominal interest rate. Type the yearly rate quoted on the account, loan or bond as a percentage, such as 6.
- Enter the expected inflation rate. Type the inflation rate you expect over the same period, such as 2.5. Use a minus sign if prices are falling.
- Read and copy the result. The real interest rate appears as you type, with the working, the exact rate, the real gain per 1,000 and which side the rate favours. Press Copy to copy it, or Clear or Esc to start again.
Example: a savings account paying 4.25% with expected inflation of 3% has a real interest rate of 1.25%.
Who Can Use This Calculator?
Frequently Asked Questions (FAQs)
What is a real interest rate?
It is the interest rate after inflation is taken out. It measures how fast the buying power of money grows, while the nominal rate measures how fast the amount of money grows.
How do you calculate the real interest rate?
Subtract the inflation rate from the nominal interest rate. A nominal rate of 6% with inflation of 2.5% gives a real interest rate of 3.5%.
What does a negative real interest rate mean?
It means inflation is higher than the interest rate. The balance still grows, but it buys less each year. A 2% deposit with 7% inflation has a real rate of −5%.
What is the difference between nominal and real interest rates?
The nominal rate is the rate quoted by the bank or lender. The real rate is the nominal rate minus inflation, so it shows the change in buying power.
Is a high real interest rate good or bad?
It depends on your side. A high real rate rewards savers and lenders and makes borrowing more costly. A low or negative real rate does the opposite.
Which inflation rate should I use?
Use the inflation you expect over the life of the loan or deposit when planning ahead, and the actual change in consumer prices when measuring a past period.
How do taxes change the real interest rate?
Tax is usually charged on nominal interest, so first multiply the nominal rate by 1 minus the tax rate, then subtract inflation. 6% with 25% tax and 2.5% inflation leaves a real 2%.
Why does the calculator show an exact rate too?
Subtracting is a close estimate. The exact rate divides the growth factors: 1.06 ÷ 1.025 − 1 is about 3.4146%, slightly under the simple 3.5%.
Is the Real Interest Rate Calculator free?
Yes. It is free to use, with no sign-up and no limit on how many times you use it.
Sources
- Wikipedia. Real interest rate.
- Wikipedia. Nominal interest rate.
- OpenStax. Principles of Macroeconomics 3e, 9.4 The Confusion Over Inflation.
- World Bank. Real interest rate (%).
- Federal Reserve Bank of Cleveland. Inflation Expectations.
- TreasuryDirect. Treasury Inflation-Protected Securities (TIPS).
- Wikipedia. Real and nominal value.
- Wikipedia. Fisher equation.
Try our Real Interest Rate Calculator to see what any savings or loan rate is worth after inflation.