Fisher Effect Calculator

Calculate the impact of inflation on nominal and real interest rates.

Understanding the Fisher Effect Formula

The Fisher Effect equation explains how inflation affects nominal and real interest rates. The formula used in this calculator is:

Real Interest Rate = (1 + Nominal Interest Rate) / (1 + Inflation Rate) - 1

This means the real interest rate is calculated by adjusting the nominal rate to remove the effect of inflation, providing a more accurate measure of purchasing power.

Example Calculation

For instance, with a nominal interest rate of 5% and an inflation rate of 3%, the real interest rate can be calculated as follows:

  • Nominal Interest Rate: 5%
  • Inflation Rate: 3%
  • Real Interest Rate: (1 + 0.05) / (1 + 0.03) - 1 = 1.94%

This demonstrates how higher inflation reduces the real interest rate, affecting purchasing power.

Why the Real Interest Rate Matters

The real interest rate helps investors and savers understand the actual growth of their money after inflation. It’s especially useful for long-term financial planning, as it reveals the true value of returns, adjusting for inflation’s erosion of purchasing power over time.