Real Interest Rate Calculator
Calculate the real interest rate using Fisher equation, adjusting nominal rates for inflation
Fisher Equation Calculator
The interest rate before adjusting for inflation
Expected change in price level over the period
Fisher Equation Results
Formula used: ir = i - πe (Real Rate = Nominal Rate - Inflation)
Economic interpretation: Minimal real return on savings
Low Real Interest Rate
Low incentive to save, encourages spending and investment
Interest Rate Analysis
Example Calculation
Savings Account Example
Nominal interest rate: 6%
Expected inflation: 2%
Calculation: ir = 6% - 2% = 4%
Result: 4% real interest rate
Interpretation
Your money grows by 4% in real purchasing power
After one year, you can buy 4% more goods/services
This represents the true cost of borrowing or return on savings
Fisher Equation Forms
Approximate
ir ≈ i - πe
Simple linear approximation
Exact
ir = (1+i)/(1+πe) - 1
Accounts for compounding effects
Nominal
i = ir + πe
Calculate nominal from real rate
Economic Indicators
Positive real rates encourage saving
Negative real rates encourage borrowing
Central banks monitor real rates for policy
Real rates affect investment decisions
Understanding Real Interest Rates
What is the Real Interest Rate?
The real interest rate is the interest rate adjusted for inflation, representing the true cost of borrowing or the real return on savings. It shows how much your purchasing power actually changes when you save or borrow money.
Why is it Important?
- •Measures true purchasing power changes
- •Guides investment and borrowing decisions
- •Influences economic policy decisions
- •Affects currency exchange rates
Fisher Equation Components
ir = i - πe
- ir: Real interest rate (inflation-adjusted)
- i: Nominal interest rate (observed rate)
- πe: Expected inflation rate
Note: The exact Fisher equation accounts for compounding: ir = (1+i)/(1+πe) - 1
For Savers
Positive real rates mean your savings grow in purchasing power. Negative real rates erode the value of cash savings over time.
For Borrowers
Negative real rates make borrowing attractive as you repay with "cheaper" money. Positive real rates increase the true cost of debt.
For Investors
Real rates affect asset valuation and investment returns. Low real rates often drive investment into riskier assets.