A larger account balance can still buy less. Compare nominal growth with the same value adjusted for assumed inflation.
Educational scenarios, not observed prices, fund performance or investment recommendations. Rates are assumptions and can change.
Sources reviewed: 2026-10-20What it means
A nominal return measures growth in money units. A real return adjusts for a change in the price level to describe purchasing power. The relevant inflation measure and time period must be comparable; your personal spending basket may differ from a published price index.
- Nominal return
- The change in money value before adjusting for inflation. It does not by itself measure purchasing power.
- Real return
- The return after adjusting for the price-level change over the same period: (1 + nominal return) / (1 + inflation) − 1.
How the calculation works
The example starts with 1,000 units and assumes 5% effective annual nominal growth for ten years. Each ending balance is divided by the cumulative inflation factor. With 3% annual inflation, the one-year real return is 1.05 / 1.03 − 1, approximately 1.94%. Subtracting 3 from 5 gives a convenient approximation, not the exact finite-period answer.
Formula
Real value = 1,000 × [1.05 / (1 + p / 100)]^10; Real rate = 1.05 / (1 + p / 100) − 1
Try a hypothetical example
Fixed 1,000 units, ten years, 5% effective annual nominal growth, constant effective annual inflation, no cash flows, taxes or fees.
- Nominal value
- 1628.89
- Inflation-adjusted value
- 1212.05
Fixed reference cases
The file contains the same fixed educational reference cases for everyone. It excludes your search and current example choices.
| Assumption (%) | Reference case | Example case |
|---|---|---|
| 0% | 1628.89 | 1628.89 |
| 2% | 1628.89 | 1336.26 |
| 3% | 1628.89 | 1212.05 |
| 5% | 1628.89 | 1000.00 |
| 8% | 1628.89 | 754.49 |
| 10% | 1628.89 | 628.01 |
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What the example does not show
The chosen inflation rate is an assumption, not a forecast or a live CPI reading. Changing inflation, investment volatility, taxes, costs and cash flows are omitted. A positive nominal return can coincide with a negative real return. Select compatible dates and price measures when interpreting real-world results.
Official educational references
Original explanation and example calculations by FinanceVelix. References support the concepts, not an endorsement of this site.
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