Investment
Real return combining investment gain and inflation
The two rates combine multiplicatively, not by subtraction. A 5% return with 3% inflation gives 1.9417% real, not 2%.
The Formula
Real Return = (1 + nominal return) / (1 + inflation) - 1
The two rates combine multiplicatively, not by subtraction. A 5% return with 3% inflation gives 1.9417% real, not 2%.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| r(nom) | Nominal investment return | decimal | The headline return before adjusting for price changes. |
| r(real) | Real return | decimal | The growth in actual purchasing power after inflation. |
What Each Symbol Means
r(nom)decimal
Nominal investment return
The headline return before adjusting for price changes.
r(real)decimal
Real return
The growth in actual purchasing power after inflation.
See It Worked With Real Numbers
A formula on its own does not tell you which number goes where. The how to calculate purchasing power page applies this equation to a concrete case, shows every intermediate step, and names the mistakes that produce a wrong answer even when the algebra is right.
Where This Formula Appears
This equation is the working core of How To Calculate Purchasing Power, filed under Finance. Every number the guide produces comes from substituting into this one line.