A 7% return with 3% inflation isn’t really 7%. The real return strips out inflation to show your true gain in purchasing power — via the Fisher equation, not just subtraction.
The example
7% nominal, 3% inflation → ~3.9% real.
| A | B | |
|---|---|---|
| 1 | Item | Value |
| 2 | Nominal | 7% |
| 3 | Inflation | 3% |
| 4 | Real return | 3.88% |
The formula
The formula:
How it works
How it works:
- Use the Fisher equation:
(1 + nominal) / (1 + inflation) − 1. - It divides the nominal growth factor by the inflation factor — the precise real return.
- The quick approximation
nominal − inflation(here 4%) is close but slightly overstates it. - A real return tells you whether your money is actually gaining buying power.
Negative real returns happen when inflation exceeds your nominal return — your money grows in dollars but shrinks in what it can buy. The Fisher formula makes that visible where simple subtraction roughly agrees.
Try it: interactive demo
Nominal and inflation.
Variations
Quick approximation
Close enough often:
Nominal from real
Reverse:
Real growth of a sum
Over years:
Pitfalls & errors
Don’t just subtract for precision. nominal−inflation is an approximation; the Fisher formula is exact.
Use consistent periods. Annual nominal with annual inflation, etc.
After-tax first? For investments, compute the after-tax nominal return, then adjust for inflation.
Practice workbook
Frequently asked questions
How do I calculate the real (inflation-adjusted) return in Excel?
Can't I just subtract inflation from the nominal return?
What does a negative real return mean?
Stop fighting formulas. Learn them in a day.
This recipe is one of hundreds of real-world formulas we teach. Our Excel Formulas & Functions class covers lookups, logic, text, and dynamic arrays hands-on — live in Dallas–Fort Worth, Houston, Austin, Oklahoma City, Denver, or online.
See the Formulas & Functions Class