BAR Economics · Updated November 2026
You Earned 6%. Did Your Purchasing Power Actually Increase 6%?
Nominal return measures dollars. Real return measures purchasing power after inflation.
Nominal rate
The nominal rate is the observed or stated rate before removing inflation's effect.
Real rate
The real rate measures the increase in purchasing power after considering inflation.
Approximation
Nominal rate minus inflation is a common approximation, while the exact relationship is multiplicative.
Business effect
Inflation affects investment returns, borrowing rates, discount rates, pricing, and forecasts.
The takeaway
A positive nominal return can still produce a weak or negative real return when inflation is high.
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FAQ
Is real rate always nominal minus inflation exactly?
No. That is an approximation.
Can real rates be negative?
Yes.
Does inflation reduce purchasing power?
Yes.