How to Calculate the Real Interest Rate
The real interest rate equals the nominal interest rate minus the inflation rate (the Fisher equation).
Formula
Real interest rate ≈ Nominal interest rate − Inflation rate
Steps
- 1Find the nominal interest rate. The stated, money interest rate on the loan or bond.
- 2Find the inflation rate. Expected inflation for forward-looking decisions, or actual inflation after the fact.
- 3Subtract. Real rate = nominal rate − inflation rate.
Worked example
If the nominal interest rate is 6% and inflation is 2%, the real interest rate = 6% − 2% = 4%.
Frequently asked questions
Why does the real interest rate matter?
It reflects the true cost of borrowing and reward for saving in terms of purchasing power, which is what drives investment and saving decisions.
What is the Fisher effect?
Over time, nominal interest rates tend to move one-for-one with expected inflation, keeping the real rate relatively stable.