Irving Fisher argued that nominal interest rates move one-for-one with expected inflation, leaving real rates unchanged in the long run. Savers care about the real rate, which is what their money actually gains in buying power.
How to use the Fisher Effect Calculator
- Nominal interest rate
- Expected inflation rate
- Target real return
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the nominal interest rate and the expected inflation rate.
Inputs explained
| Field | What to enter |
|---|---|
| Nominal interest rate | In % |
| Expected inflation rate | In % |
| Target real return | In % |
What each result means
- Real interest rate (exact) = ((1 + [Nominal interest rate]÷100)÷(1 + [Expected inflation rate]÷100) – 1)×100
- Real interest rate (approximation) = [Nominal interest rate] – [Expected inflation rate]
- Nominal rate needed for the target real return = ((1 + [Target real return]÷100)×(1 + [Expected inflation rate]÷100) – 1)×100
Example values
How the main result changes when Nominal interest rate changes and everything else stays at the example values above:
| Nominal interest rate (%) | Real interest rate (exact) (%) |
|---|---|
| 2.5 | -0.485 |
| 3.75 | 0.728 |
| 5 | 1.942 |
| 6.25 | 3.155 |
| 7.5 | 4.369 |
| 10 | 6.796 |
Formula
Exact: (1 + nominal) = (1 + real) × (1 + inflation)
Real = (1 + nominal) ÷ (1 + inflation) − 1
Approximation: real ≈ nominal − inflation
Worked example
Inputs: Nominal interest rate: 5 %; Expected inflation rate: 3 %; Target real return: 2 %.
Results: Real interest rate (exact) = 1.942 %; Real interest rate (approximation) = 2 %; Nominal rate needed for the target real return = 5.06 %.
Frequently asked questions
What is the Fisher effect?
Nominal rates adjust to expected inflation, keeping real rates stable.
How do I calculate the real interest rate?
(1 + nominal) ÷ (1 + inflation) − 1.
When is the approximation good enough?
When rates and inflation are low.