Real interest rates: nominal rates minus inflation, explained

A real interest rate is an interest rate after inflation. If a savings account pays 4% and prices rise 3%, your money buys only about 1% more a year later: the nominal rate is 4%, the real rate is about 1%. Interest rates as quoted, on loans, bonds or the Fed's target, are nominal. What matters for savers, borrowers and investors is the real rate, because that is what changes purchasing power.

Real rates explain things nominal rates cannot. An 8.5% policy rate was loose in December 1974, when inflation was 12%, and the near-zero policy rate of early 2022 was the loosest on record in real terms because inflation was running at 7% to 9%. Real yields also drive the valuation of long-lived assets such as growth stocks and gold. This guide shows how to calculate real rates, the difference between looking back and looking forward, and what the two most watched measures, the real fed funds rate and the 10-year TIPS yield, have done.

The formula

The approximation is fine when rates are low. At high rates the gap grows: a 19% nominal rate with 10% inflation gives an exact real rate of 1.19 ÷ 1.10 − 1 = 8.2%, not 9%.

Which inflation? Two choices matter:

• Ex post uses inflation that has already happened, usually the latest 12-month change in the CPI or PCE price index. It is easy to compute and is what the chart below shows.
• Ex ante uses inflation expected over the life of the loan or bond. That is what lenders and borrowers actually decide on, but expectations are not observed directly. The cleanest market measure is the yield on Treasury Inflation-Protected Securities (TIPS), covered below.

Worked example: a Treasury bill in September 2026

The real fed funds rate since 1960

The real policy rate is the simplest gauge of how tight or loose monetary policy is. It has had four distinct regimes.

The 1970s: negative real rates. Policy rates rose, but inflation rose faster, so borrowers repaid in cheaper dollars. Stagflation: high inflation, weak growth and the 1970s lesson covers the decade.

1980s: strongly positive. The FOMC pushed the effective rate to a monthly average of 19.1% in June 1981, and with inflation falling the real rate stayed between about +2% and +8% from 1982 through 1989. That is what squeezing inflation out of an economy looks like.

2009–2021: below zero most of the time. The policy rate sat near zero while inflation stayed positive. From November 2009 to September 2026 the real fed funds rate was negative in 146 of the 202 months with data.

2022 to 2026: from record low to positive and back toward zero. In March 2022 the effective rate averaged 0.20% while CPI inflation was 8.6%: a real rate of −8.4%, the lowest in the series. Eleven hikes later the real rate turned positive in May 2023, was about +2% from mid-2023 and +2.4% in June 2024. By September 2026, with the range at 3.75%–4.00% and CPI inflation at 3.7%, it was close to zero; measured against PCE inflation it was about +0.1%.

The 10-year TIPS yield: a market real rate

TIPS pay a fixed real coupon on a principal that rises with the CPI, so their yield is a real yield set by the market. The difference between an ordinary Treasury yield and the TIPS yield of the same maturity is the breakeven inflation rate: the inflation rate at which the two would pay the same. TIPS and breakeven inflation: how inflation-protected bonds work explains the mechanics.

The decomposition shows what moved. In 2022 the nominal 10-year yield rose 2.36 points, from 1.52% to 3.88%. The breakeven fell slightly, from 2.56% to 2.30%, so the entire rise, and more, came from the real yield, which climbed 2.62 points from −1.04% to 1.58%. For investors that distinction matters: rising real yields raise the discount rate on every long-lived cash flow, which is the channel How interest rates affect stocks: discount rates and equity duration describes for 2022.

Why real rates matter for markets

• Stocks. A higher real yield raises the return investors can lock in without risk, so future profits are discounted more heavily. Long-duration growth stocks are most exposed.
• Gold. Gold pays no interest, so its opportunity cost is the real yield on safe bonds. Low or negative real yields have often coincided with strong gold prices; see Gold and precious metals: how gold is priced and what drives it.
• Borrowers and savers. Negative real rates transfer wealth from savers to borrowers; positive real rates reverse it.
• Policy stance. Central banks judge tightness by the real policy rate against an estimate of neutral, not by the nominal rate alone.

Pitfalls and limitations

• Backward-looking inflation can mislead. Ex post real rates use last year's inflation. When inflation is turning, the ex ante rate that matters can be very different.
• Choice of index. CPI usually runs above PCE; the same nominal rate gives a lower real rate against CPI. Say which you used.
• Annual change hides gaps. A 12-month change needs the same month a year earlier. When a monthly data point is missing, comparing with the observation 12 rows earlier gives the wrong period.
• TIPS yields are not pure expectations. Breakevens also carry liquidity and inflation risk premiums, so they are an imperfect read on expected inflation.
• Taxes. Interest is taxed on its nominal amount, so after-tax real returns are lower than the pre-tax real rate.

Real rate measures compared

How Finabase does it

Finabase does not compute or display real interest rates, inflation data or breakevens; the charts and tables on this page are ours, built by Finabase Research from Federal Reserve, BLS and BEA data on FRED. In the app you can follow the nominal side: the Treasury yields table and the 10-year yield. You can also chart TIP, an exchange-traded fund that holds TIPS, and GLD, a gold fund, two assets whose prices respond to real yields.

Frequently asked questions

What is a real interest rate in simple terms?

It is the interest rate minus inflation: how much more your money can buy after earning interest for a year. A 5% rate with 3% inflation is a real rate of about 2%.

Can real interest rates be negative?

Yes, whenever inflation exceeds the nominal rate. The real fed funds rate was negative in most months from late 2009 to 2021 and reached −8.4% in March 2022. The 10-year TIPS yield was below zero for much of 2020 and 2021.

What is the real interest rate today?

On October 28, 2026 the 10-year TIPS yield was 2.67%. The real fed funds rate in September 2026 was close to zero: a 3.75% effective rate against 3.7% CPI inflation.

Why do real interest rates matter for stocks?

Because they set the risk-free real return that every investment competes with. Higher real yields mean future profits are discounted more heavily, which weighs most on companies whose profits lie far in the future.

Summary

A real interest rate is a nominal rate adjusted for inflation: approximately the rate minus inflation, exactly (1 + nominal) ÷ (1 + inflation) − 1. Ex post real rates use past inflation; ex ante rates, which markets price, use expected inflation, and the 10-year TIPS yield is the clearest market measure. The real fed funds rate swung from +9.4% in 1981 to −8.4% in 2022 and was near zero in September 2026, below the roughly 1.2% neutral level implied by the FOMC's projections. The 10-year TIPS yield rose from −1.19% in 2021 to 2.67% in October 2026, and in 2022 it accounted for all of the rise in the nominal 10-year yield. Watching real rates, not just nominal ones, is how to judge whether policy is tight and what the bond market is really paying.