Distinguish the interest rate from purchasing power

TradingPedia distinguishes a nominal interest rate from a real rate adjusted for changes in prices. The difference matters because a larger money balance does not necessarily buy more goods and services. Inflation is an aggregate measure, and an individual household’s spending pattern can differ from the published basket.

For a simple illustration, an assumed nominal return of 4% and inflation of 3% suggest roughly 1% real growth before tax and charges. That subtraction is an approximation; an exact one period comparison divides one plus the nominal return by one plus inflation, then subtracts one. Keep expected inflation separate from inflation observed afterward. Use consistent dates and annualization, and avoid treating a hypothetical real rate as an available account offer or a forecast of future prices.

Source: TradingPedia educational material. Reviewed 9 November 2026.