What Is the Connection Between Nominal Interest Rate and Inflation?

The nominal interest rate is the rate of unadjusted inflation factors announced by the central bank or other institutions that provide funds and loans, that is, the ratio of the monetary amount of interest (remuneration) to the monetary amount of principal. Refers to interest rates that include compensation for inflation (including deflation) risks. ^[1]

Nominal interest rate

Compared to real interest rate

Nominal interest rates are not available to investors

[Calculation formula]

The rough calculation formula can be written as:

r = i + p

Among them, r is the nominal interest rate, i is the real interest rate, and p is the rate of change of the price level during the borrowing period. It can be positive or negative. A more precise calculation formula can be written as:

r = (1 + i) (1 + p) -1

i = (1 + r) / (1 + p) -1

This is the formula for calculating the real interest rate currently used internationally.