Real Rate vs. Nominal Rate
You were happy that the deposit rate was 3%, but if prices rose 4% that year, did your money really grow? The answer to this question is exactly the difference between the nominal rate and the real rate.
Nominal rate vs. real rate: what's the difference
The nominal rate is the interest rate exactly as 'stated' on a bank product or bond. It's that number when you say a deposit is 3% or a government bond is 4%.
The real rate is what's left after subtracting inflation from that—'the extent to which your purchasing power actually grew.'
For example, if a deposit rate is 3% but prices rose 4% that year, the number in your account grew 3%, yet the amount of goods you can buy actually shrank. The nominal rate is +3%, but the real rate is roughly -1%.
In the end, to judge whether your money actually grew, you should look at the real rate, not the nominal rate.
The Fisher equation: nominal = real + expected inflation
The 'Fisher equation,' named after the economist Irving Fisher, organizes this relationship.
Nominal rate ≈ real rate + expected inflation
Flipping it around, real rate ≈ nominal rate − expected inflation. As in the earlier example, subtracting expected inflation of 4% from a nominal 3% gives a real rate of about -1%.
Strictly, it's (1+nominal) = (1+real) × (1+inflation), but when the numbers aren't large, approximating with 'subtraction' works without much trouble.
The point is one thing: as much as prices rise, the interest goes toward making up for 'standing still,' and only what's left over is a real gain.
What we use here is 'expected' inflation. Since future prices aren't a fixed value, the real rate can only be calculated precisely after actual inflation is confirmed after the fact. (Source: Corporate Finance Institute — Fisher Equation)
How the market knows expected inflation: TIPS and BEI
So who sets 'expected inflation'? You can read it in reverse from market prices.
The U.S. has Treasury Inflation-Protected Securities (TIPS), whose principal and interest are adjusted in line with prices. TIPS yields have the inflation effect removed, so they themselves are close to the 'real rate.'
So if you subtract the TIPS yield (real) from the yield of an ordinary government bond of the same maturity (nominal), you get the expected inflation the market is pricing in. This is called BEI (Breakeven Inflation).
BEI = nominal government-bond yield − inflation-protected (real) yield
When the news says '10-year expected inflation rose to 2.3%,' it usually refers to this BEI. It's an example of the Fisher equation coming alive with actual market data.
BEI is only 'an estimate the market prices in,' not the correct answer for future inflation. Bond supply and demand, liquidity premiums, and more are mixed in, so it can differ from actual inflation. (Source: AIER — Assessing Market Expectations of Inflation)
Why the real rate matters to investors
The real rate reveals 'hidden gains and losses.'
If you look only at the nominal return, it's easy to relax because it's positive, but if the real return adjusted for prices is negative, you're actually losing purchasing power. Especially in periods of high inflation, the real rate on deposits and safe assets has often fallen into negative territory.
So when looking at long-term investing, you should also consider 'how much it actually grew after subtracting inflation,' not just 'what % I earned in nominal terms.' This is also why this service separately points out the inflation effect when looking at returns.
Don't be fooled by the stated number; it's important to build the habit of recalculating on a purchasing-power basis.
Preguntas frecuentes
Q. If the real rate is negative, should I not use a deposit?
The judgment of 'should not' depends on your situation. A negative real rate means that a deposit alone can slowly erode purchasing power, but a deposit provides other values—principal stability and liquidity. What matters is not mistaking it for a gain by looking only at the 'stated rate.' The key is the habit of also checking the real return adjusted for prices.
Q. If I just subtract inflation from the nominal rate, is that the real rate?
As an approximation, yes. When the numbers are small, approximating with 'nominal − expected inflation' has little error. Strictly, though, the relationship is (1+nominal) = (1+real) × (1+inflation), so when inflation or rates are very high, the gap from simple subtraction grows. Use subtraction to grasp the concept, and the multiplication formula when you need a precise calculation.
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📋 Los resultados se basan en datos históricos; las rentabilidades pasadas no garantizan rentabilidades futuras.
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