Real Interest Rate Calculator (Fisher Equation)
Convert a nominal interest rate and inflation rate into the real interest rate using the exact Fisher equation.
Result
- Nominal rate7.000%
- Inflation rate3.000%
- Real rate (exact Fisher)3.8835%
- Real rate (approximation)4.000%
- Approximation error0.1165%
- Purchasing powergaining
Step-by-step
- Fisher: real = (1 + nominal) ÷ (1 + inflation) − 1 = (1 + 0.07) ÷ (1 + 0.03) − 1.
- Real rate = 3.8835% (exact), versus the 4.000% you get by simply subtracting.
- The real rate is positive — your money grows in real terms.
How to use this calculator
- Enter the nominal (stated) interest rate.
- Enter the inflation rate.
- Read the exact real interest rate from the Fisher equation.
- Compare it to the simple subtraction approximation and note if it is negative.
About this calculator
The real interest rate is the return on money after stripping out inflation — what your savings actually gain in purchasing power, as opposed to the nominal (stated) rate. The Fisher equation, named after economist Irving Fisher, links the three: one plus the nominal rate equals one plus the real rate times one plus inflation. Solving for the real rate means dividing, not just subtracting: real = (1 + nominal) ÷ (1 + inflation) − 1. The common shortcut of subtracting inflation from the nominal rate is a good approximation only when rates are low; at higher rates the difference grows. This calculator shows both the exact Fisher result and the approximation, plus the error between them, and flags when the real rate is negative — meaning inflation is outpacing your interest and your money is quietly losing value.
How it works — the formula
(1 + nominal) = (1 + real)(1 + inflation)
Real = (1 + nominal) / (1 + inflation) − 1
Approx: Real ≈ nominal − inflationThe exact relationship is multiplicative; dividing isolates the real rate. Subtraction is a first-order approximation.
Worked examples
- Inputs:
- nominal=7, inflation=3
- Output:
- real 3.8835% (approx says 4%)
- Inputs:
- nominal=2, inflation=5
- Output:
- real −2.857% (negative)
- Inputs:
- nominal=12, inflation=8
- Output:
- real 3.704% (approx 4%)
Limitations
- Uses annual rates; match the compounding period for consistency.
- Expected vs realized inflation differ — uses the figure you enter.
- Pre-tax; taxes further reduce the real after-tax rate.
Definitional calculation; inflation expectations are uncertain.