Economy and interest rates · updated October 21, 2026
What is the real interest rate and how is it calculated
The real interest rate shows how much your buying power actually grows: the interest you earn, minus inflation. A savings account paying 6% a year, with 4% inflation, makes you only about 2% richer each year.
The real interest rate formula
- Nominal rate
- The rate shown by the bank or the bond, written as a decimal (6% becomes 0.06).
- Inflation
- The rise in prices over the same period, also as a decimal.
- The quick version
- Nominal rate minus inflation. It is very close to the exact result when the numbers are small.
Worked example
Your money sits in a savings account paying 6% a year, and inflation is 4%.
With $10,000, a year from now you have $10,600, which buys what $10,192 buys today. If the interest is taxed, the real gain is even smaller.
How to read the real interest rate
Central banks sometimes keep real rates negative, so people spend and companies invest. When they want to stop inflation, they push them above zero.
When the real interest rate can fool you
Future inflation is what counts: the rate is fixed today, while the inflation that eats your money comes over the next year. Tax: work out the real rate after tax, where interest is taxed.
Related terms
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Questions about the real interest rate
What does a negative real rate mean?
That the interest you earn is lower than inflation. You have more dollars, but they buy less than when you started.
Why not just subtract inflation from the rate?
You can, as a quick estimate. The exact formula divides instead of subtracting, and the difference only gets large when rates and inflation are high.
These explanations are for information only. They are not a recommendation to buy or sell.
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