The nominal interest rate is the stated, money rate of return on a loan or deposit; the real interest rate is the nominal rate adjusted for inflation, showing the true gain in purchasing power.
- The relationship (the Fisher equation) is approximately: real interest rate equals nominal interest rate minus the inflation rate.
- If a deposit pays 7 percent and inflation is 5 percent, the real return is only about 2 percent; the saver's purchasing power rises by that much.
- When inflation exceeds the nominal rate, the real interest rate is negative, and savers actually lose purchasing power.
- Lenders and savers care about the real rate, because it reflects the actual reward after price rises; see concept inflation.
- The same logic separates real GDP from nominal GDP and real income from money income; see concept gdp deflator.
The distinction (nominal is the stated rate; real is inflation-adjusted) and the simple formula (real equals nominal minus inflation) are testable monetary facts.
The nominal rate is the stated figure; the real rate subtracts inflation; if inflation is higher than the nominal rate, the real rate is negative and savers lose value.
Real interest rate equals nominal rate minus inflation; it shows the true gain in purchasing power.