Key Terms
Real return
The return on money after inflation is subtracted, measuring the change in what the money buys rather than in its face amount.
By the Investfora Research Desk
Real return is the return on money after inflation has been subtracted: it measures the change in what the money buys, not the change in its face amount. The unadjusted figure is the nominal return. Because prices rarely stand still, the two diverge, and the wedge between them is the inflation rate over the same period. A nominal gain becomes a real loss whenever inflation outruns it.
A worked example
Suppose savings earn a nominal 4 per cent over a year in which prices, hypothetically, rise by 6 per cent. The quick approximation subtracts one figure from the other: 4 minus 6 gives a real return of roughly minus 2 per cent. The precise calculation divides money growth by price growth: 1.04 divided by 1.06 is about 0.981, a real return of about minus 1.9 per cent. Either way, the saver ends the year able to buy less than at the start.
Real return adjusts for a general price index, not for any one person's spending, and it says nothing about tax, risk or how the return was earned. Purchasing power is measured against the index's basket, which may differ from the basket anyone actually buys.