Markets · 6 pages · 12 min

How a real interest rate subtracts inflation

A real interest rate is a nominal rate with inflation taken out, so it refers to purchasing power.

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From the opening

A real interest rate starts from a nominal interest rate, which is the rate promised in money, and then removes inflation so the remainder refers to purchasing power. The everyday version subtracts an inflation rate from the nominal rate, which is the shortcut the phrase is pointing at. The opening covers start with the money rate, subtract a matching inflation rate, and the shortcut approximates a product.

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Inside

Start with the money rate
Subtract a matching inflation rate
The shortcut approximates a product
Expected and past inflation differ
Where the idea stops applying
A distinction worth keeping

Sources

Fisher equation
Real interest rate

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How a real interest rate subtracts inflation

From the opening

Inside

Sources

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