Real interest rate

The real interest rate is an interest rate adjusted to strip out the effect of inflation, showing the actual growth in purchasing power an investor earns rather than just the number printed on a bond or savings account.

The formula is:

A savings account paying 3% sounds fine until inflation running at 4% is factored in, leaving a real interest rate of negative 1%, meaning the saver is losing purchasing power despite earning a positive nominal return. When the real interest rate is negative, holding cash or bonds with low yields guarantees a loss in real terms, which historically pushes investors toward stocks and other assets that have a better chance of outpacing inflation.

When the real interest rate is meaningfully positive, safe assets like government bonds become more competitive with stocks, since an investor can earn a return above inflation without taking on equity risk, which can pull some demand away from riskier assets.