Your money can grow and still buy less. How to take inflation out, with real examples from the S&P 500 and Spain.
Key findings
- Real return = (1 + nominal) ÷ (1 + inflation) − 1: with 5% and 3% inflation, 1.94%.
- The S&P 500 with dividends returned 6.06% a year from 2000 to 2019; after US inflation, 3.84%.
- A 2% savings account in Spain from 2021 to 2026 would have lost 2.26% a year in purchasing power.
Two figures for the same investment
The nominal return is the one on your statement: how much your money has grown in euros or dollars. The real return is the one that matters for your life: how much more you can buy with it. The difference between the two is inflation.
If your investment gains 5% in a year and prices rise 3%, you have more money, but not 5% more purchasing power. Nor exactly 2%: the right calculation divides rather than subtracts.
The formula
Real return = (1 + nominal return) ÷ (1 + inflation) − 1
With the example above: 1.05 ÷ 1.03 − 1 = 1.94%. Subtracting (5% − 3% = 2%) is an approximation that works with small figures, but it drifts when inflation or returns are high, or when many years add up.
A real case: the S&P 500 from 2000 to 2019
$10,000 invested in the S&P 500 with dividends at the end of 1999 was worth $32,421 at the end of 2019: 6.06% a year. Over those 20 years, US prices rose 2.14% a year according to the official BLS CPI, 52.7% in total. After that rise, the real return was 3.84% a year.
Put another way: the $32,421 of 2019 bought the same as about $21,233 in 1999. Your money did not grow 3.2 times, but just over 2 times in purchasing power. Still a good result, but far less spectacular.
When the real return is negative
This happens often with savings accounts and deposits. Using Spain's official HICP, prices rose 4.35% a year between September 2021 and September 2026. An account paying 2% a year throughout would have turned €1,000 into €1,104, but that money would buy the same as €892 in 2021: a real return of −2.26% a year.
Over 10 years, from September 2016 to September 2026, Spanish inflation was 2.94% a year. The same 2% account would have left €1,219, with the purchasing power of €913 in 2016. The balance rises, but it buys a little less every year.
These examples assume a fixed 2% throughout; they are not the rates any particular account paid. And if you pay tax on interest or gains, the real return is lower still.
How to use it in your decisions
- Always compare in real terms. 4% with 1% inflation beats 6% with 5% inflation.
- Look at inflation for the period that matters to you. Not a single year: the average over several years tells you more.
- Do not worry about a negative real return on your emergency fund. That money is there to be available, not to earn. The problem is keeping money there that you will not need for many years.
- For long-term goals, plan in today's money. If you work out how much you will need in 20 years, do it with today's prices and a real return, or with nominal figures and inflation included, but do not mix the two.
Run your own numbers
In the annualized return calculator you can enter what you invested and what you have, and fill in inflation with your country's official figure for the same period. In the S&P 500 historical return calculator, tick “Adjust for US inflation” to see any period since 1913 in today's dollars. And with the inflation calculator, see what money from any month is worth today.