Real vs Nominal Return, How to Subtract Inflation Correctly
If your savings account pays 0.37% and prices rise 3.4%, did you earn money or lose it? You gained dollars, but the dollars buy less. The first number is your nominal return. The number that tells you what happened to your purchasing power is your real return. Getting it right takes one formula and two inputs, both published by federal agencies.
1. The two inputs
Your nominal rate. This is the rate your account or investment actually pays. For a benchmark, the FDIC publishes national average deposit rates every month. In its table published September 21, 2026, the national rate was 0.37% for savings accounts and 1.73% for 12-month CDs. Those are averages; plenty of accounts pay more or less.
The inflation rate. The Bureau of Labor Statistics publishes the Consumer Price Index each month. Its August 2026 release reported that the all items index for all urban consumers increased 3.4% over the last 12 months before seasonal adjustment.
2. The exact formula
The real return is:
Real return = (1 + nominal rate) / (1 + inflation rate) - 1
The shortcut many people use is nominal minus inflation. It is close when both numbers are small, but it is not exact, and the gap widens as rates rise. Here is how both versions compare using the figures above, plus a 4.26% rate for contrast:
| Nominal rate | Inflation | Shortcut (subtract) | Exact real return |
|---|---|---|---|
| 0.37% | 3.4% | -3.03% | -2.93% |
| 1.73% | 3.4% | -1.67% | -1.62% |
| 4.26% | 3.4% | +0.86% | +0.83% |
3. What the numbers mean in dollars
Put $10,000 in an account paying the 0.37% national average for one year. Your balance becomes $10,037. That is the nominal result.
Now adjust for the 3.4% rise in prices. $10,037 divided by 1.034 equals about $9,707 in the prior year's dollars. In other words, after a year your balance buys about what $9,707 bought a year earlier. Your account statement shows a gain of $37, but your purchasing power fell by roughly $293.
This is the point of computing real return. It translates a rate into the question you actually care about: can this money buy more, or less, than it could before?
4. Why the shortcut is off
Subtracting inflation treats the interest you earn as if it were not affected by rising prices. In reality, the interest dollars lose value too. Dividing by (1 + inflation) corrects for that. With a 0.37% rate and 3.4% inflation, the difference between the shortcut and the exact answer is only about a tenth of a point, but at higher rates and higher inflation it grows. When you compare two options with similar returns, using the exact formula prevents a rounding error from deciding the answer.
5. Taxes make it worse
The figures above are before tax. Interest on most savings accounts and CDs is taxable as ordinary income in the year it is paid, while inflation erodes the full balance regardless. If part of the 0.37% goes to taxes, the real after-tax return is even lower than -2.93%. When you compare options, use the after-tax nominal rate in the formula if you can estimate it.
6. Using real return without overreacting
A negative real return on cash does not mean cash is pointless. An emergency fund is there to be available and stable, not to beat inflation. The real return calculation is most useful for three things:
- Checking whether a "high" rate really is high. A rate that looks generous may be roughly flat in real terms.
- Comparing accounts that hold the same kind of money. If two safe accounts differ by a full point, the real return gap is about the same, and over several years it adds up.
- Setting expectations for long-term goals. Planning in real terms keeps future targets in today's dollars, which makes them easier to judge.
Remember that both inputs move. The FDIC updates national rates monthly, and the BLS updates the CPI monthly. A real return calculated today is a snapshot, not a promise about next year.
7. Key takeaways
- Nominal return counts dollars; real return counts purchasing power.
- Use (1 + nominal) / (1 + inflation) - 1 for the exact real return; subtracting is only an approximation.
- With the FDIC's 0.37% national savings average and 3.4% CPI inflation for the year to August 2026, the real return is about -2.93%.
- $10,000 at 0.37% becomes $10,037, but buys only about what $9,707 bought a year earlier.
- Taxes on interest lower the real return further, so use after-tax rates when comparing options.