Inflation and real return

The idea in one paragraph

A nominal balance is a currency amount. Purchasing power is what that amount buys after prices rise. The inflation calculator grows a balance at the nominal rate you type, then deflates it by the inflation rate you type. The annual real return comes from the Fisher equation, not from subtracting the two rates.

When to use

Use it when a savings goal or a compound-interest chart looks large and you want the same path in today’s money. Current CPI fills the latest 12-month CPI-U change, and you can still edit the field. On the Portuguese pages, Current IPCA fills the 12-month accumulated IPCA the same way and shows the reference month. The number is not a forecast.

The formula in plain English

Real return = (1 + nominal) / (1 + inflation) − 1
Purchasing power = nominal balance / (1 + inflation)^years

The nominal balance uses monthly compounding with end-of-month contributions, the same engine as the compound-interest calculator. Contributions stay at the number you type. They do not step up with prices. Fees and taxes are not deducted.

Subtracting inflation from the nominal rate is a rough shortcut. It is close when both rates are small and it drifts as they grow. This page does not use the shortcut.

A worked example

Leave 10,000 idle, earn 0%, and assume 10% inflation for one year. The nominal balance is still 10,000. Purchasing power is 10,000 / 1.10, about 9,091. The Fisher real return is about −9.09%, not −10%. That one-point gap is the whole point of the formula.

How to read the result

Green on the chart is the nominal balance. Amber is what it buys in today’s money. Scenario B is a second inflation rate or a second nominal return. The real-return card uses only the two annual rates. It does not depend on the contribution.

Common mistakes

Calling nominal minus inflation the real return.

Reading the nominal balance as what the money will buy.

Assuming monthly contributions grow with prices. In this model they stay flat.

FAQ

Which inflation rate should I type?

Any assumption you want to test. Current CPI fills the latest 12-month CPI-U change, and you can still type over it. Indicative rate, not a recommendation.

Why isn’t real return just the difference of the two rates?

The shortcut drifts as the rates grow. The Fisher equation is what the calculator reports.

Do contributions rise with inflation?

No. Each monthly contribution stays at the number you typed. Stepping them up would be a different model.

Does this page include a policy rate or income tax?

No. You supply a nominal return and an inflation rate. Taxes and any benchmark interest rate sit outside the model.

Is this financial advice?

No. It is an educational view of purchasing power that runs in your browser.

Related guides

• How a savings goal is calculated — set the target in nominal currency, then stress it here.
• How big an emergency fund should be — cash has a real return near the negative of inflation.
• How compound interest actually works — the nominal path this page deflates.
• How much home you can afford — a housing budget in today’s money.

Try it with your figures

Open the inflation calculator, type a nominal return and an inflation assumption, and read the purchasing-power line before the nominal balance. Share the URL to keep the same inputs.