Real rate

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A real terms rate - often abbreviated to 'real rate' - is one which has been restated to exclude the effects of inflation.

Items, such as rates, which have not been adjusted for inflation are often known as 'money terms' rates, 'nominal terms' rates, or 'nominal' rates.


The relationship between the Real terms rate, the Nominal rate and the Inflation rate is:


Real rate = ( (1 + Nominal rate) / (1 + Inflation rate) ) - 1


Example

Nominal rate of return = 6% (0.06).

Inflation rate = 3% (0.03).


The Real rate of return is:

= (1.06 / 1.03) - 1

= 0.0291

= 2.91%.


See also