Fisher Effect Calculator
Calculate real interest rate using the Fisher Effect to understand inflation's impact on investments
Calculate Fisher Effect
The market interest rate before adjusting for inflation
The anticipated rate of price increase over time
Fisher Effect Results
Fisher Effect Formula: Real Rate = Nominal Rate - Expected Inflation
Calculation: 0% - 0% = 0.00%
Exact Formula: (1 + 0%) ÷ (1 + 0%) - 1 = 0.0000%
Interest Rate Analysis
Example Calculation
Bank Loan Example
Nominal Interest Rate: 7% (bank loan rate)
Expected Inflation: 3% (CPI forecast)
Economic Context: Moderate inflation environment
Investment Decision: Evaluate loan cost vs. inflation
Fisher Effect Calculation
Real Interest Rate = 7% - 3% = 4%
Real Interest Rate = 4%
Interpretation: The loan costs 4% in real purchasing power terms
Exact Fisher: (1.07 ÷ 1.03) - 1 = 3.88%
Fisher Effect Components
Nominal Rate
Market interest rate before inflation adjustment
Expected Inflation
Anticipated rate of price increases
Real Rate
Purchasing power adjusted return
Economic Applications
Investment return analysis
Bank loan cost evaluation
Monetary policy analysis
International finance comparisons
Understanding the Fisher Effect
What is the Fisher Effect?
The Fisher Effect is an economic theory developed by Irving Fisher that describes the relationship between nominal interest rates, real interest rates, and expected inflation. It states that nominal interest rates adjust to maintain constant real interest rates when inflation expectations change.
Why is it Important?
- •Evaluates real purchasing power of investments
- •Guides monetary policy decisions
- •Helps compare investments across different inflation environments
- •Essential for long-term financial planning
Fisher Effect Formulas
Simplified: r = i - π
Exact: r = (1 + i) / (1 + π) - 1
- r: Real interest rate
- i: Nominal interest rate
- π: Expected inflation rate
Note: The simplified formula is widely used for practical calculations, while the exact formula is more precise for higher inflation rates.
Economic Interpretation
Positive Real Rate
When the real interest rate is positive, investments gain purchasing power over time. This indicates that the nominal return exceeds inflation, preserving and growing wealth.
Negative Real Rate
When the real interest rate is negative, inflation erodes the purchasing power of investments. This often occurs during high inflation periods or when central banks keep rates low.