6 ms·

How so?

• LyndsySimon 9y ago
  I'm not a mathematician by any means, but I would think that (interest rate) - (rate of inflation) = (effective interest rate)
  • pc86 9y ago
    No
  • smallnamespace 9y ago
    You've just defined the real interest rate, as opposed to the nominal rate
• oliwarner 9y ago
  Say you put £100 in the bank 50 years ago. Compound interest tells us how much money we have. If we assume an improbably static 2% every year, today we have ~£270 in our account. Inflation doesn't work on top of that because £270 is what it's already worth today. Inflation tells us what our original £100 is worth in terms of buying power. If a loaf of bread cost £0.10 in 1967 but costs £1.50 today, we can say over 50 years there has been 150% inflation. These sorts of price index comparisons allow us to compare worth back then. Or in reverse, you can see this in very real terms. You could look at your £270 and see that would only buy you 180 loaves of bread. In 1967, your £100 would have garnered 1000 loaves. Interest has not kept up with inflation. You have lost money —in this example— by "saving" it. On a shorter timescale, RPI and CPI allow central banks to see inflation and —to a point— alter their base rates to help influence the balance of savers-vs-spenders, lessening the popular disposable cash, and lessening inflation. That's the theory, anyway.
  • oliwarner 9y ago
    Though obviously I skwonked the percentage increase there. The inflation in that tiny bread example was 1400%