Set the nominal rate i and inflation rate π to compute the real rate r. Move the sliders to see the live result.
r = i − π
5.00%
2.00%
Nominal rate i
5.00%
Inflation π
2.00%
Real rate r = i − π
3.00%
Try this
Set i = 4%, π = 6%. The real rate is NEGATIVE (−2%) — savers lose purchasing power even though banks "pay" them 4%. This happened in many countries during 2022. Now try i = 4%, π = −1% (deflation): real rate = 5% — savers gain even with a low nominal rate.
Pre-set scenarios show how borrowers and lenders fare when ACTUAL inflation differs from EXPECTED inflation.
rex ante = i − πe | rex post = i − πactual
PICK A CASE
Nominal rate i
5.00%
Expected π_e
2.00%
Actual π
2.00%
r_ex_ante = i − π_e
3.00%
r_ex_post = i − π
3.00%
Why this matters
Long-term contracts (mortgages, bonds, pensions) are written at a NOMINAL rate. If inflation surprises upward, borrowers benefit (their real debt shrinks); lenders lose. The opposite holds for surprise disinflation. Indexed bonds (TIPS) avoid this risk by paying r + actual π.
When government finances spending by creating money, it imposes an "inflation tax" on holders of money. Compute the revenue and burden.
Seigniorage = π · (M / P)
$5.0T
1.00
5%
$20.0T
Real money M/P
$5.0T
Inflation tax (per year)
$0.25T
As % of GDP
1.25%
As % of M/P
5.0%
The Laffer-curve insight
As π rises, money holders try to ESCAPE money (hold less of it, switch to dollars or hard assets). Eventually the inflation tax base (M/P) shrinks faster than the tax rate (π) rises — total seigniorage FALLS. This is why hyperinflations are self-defeating as a financing strategy.