Inflation and real rate of return calculator

A nominal gain tells you how much the number on your account has grown. A real gain tells you how much more you can actually buy with it. When inflation runs higher, the two can diverge so far that a term deposit that is profitable on paper loses money in real terms.

The calculator converts a nominal rate into a real one, shows the purchasing power of an amount after a given number of years, and lets you factor in capital gains tax straight away, because that tax is charged on the nominal gain, not the real one.

The Fisher equation instead of simple subtraction

The common shortcut is to subtract inflation from the rate of return, but the correct method is a ratio: one plus the nominal rate divided by one plus inflation, minus one. At low values the difference is cosmetic; at high values it becomes material.

With inflation of 12 percent and a return of 15 percent, the simple shortcut suggests a real gain of 3 percent, while the correct calculation gives about 2.7 percent. The higher the values, the more the shortcut overstates the result.

Tax on the nominal gain is a hidden cost of inflation

The tax authorities tax the nominal gain, so when inflation is high you also pay tax on the part of the gain that merely makes up for the falling value of money. That is why the real after-tax result can be negative even when the nominal gain is positive.

So when you compare a term deposit with an inflation-linked bond or with equities, you have to look at the real after-tax result. That number alone tells you whether your capital has actually gained purchasing power.