What it is
The real interest rate is calculated by subtracting the inflation rate from the nominal (stated) interest rate. For example, if a bond pays a 5% nominal interest rate and inflation is 3%, the real interest rate is 2%. This metric provides a more accurate picture of the economic benefit or cost because it accounts for the erosion of purchasing power due to rising prices. It reveals how much an investment truly grows or how much borrowing truly costs after accounting for inflation.
Central banks consider the real interest rate when setting monetary policy, particularly the federal funds rate, to influence economic activity. A high real interest rate can dampen borrowing and spending, while a low or negative real interest rate can stimulate it. The market for Treasury Inflation-Protected Securities (TIPS) directly reflects real yields. Investors monitor real rates to assess the attractiveness of fixed-income investments and the real cost of corporate debt.
Why it matters
Real interest rates show if your investments are truly growing or if inflation is eating away your returns. They also indicate the true cost of borrowing money.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice