Real rate of return = nominal rate of return inflationyou receive a nominal rate of return from your investment, but because inflation is higher, your real return will be lower. for example, if i asked to borrow from you $100 and were to pay you $107 at the end of one year, your nominal rate of return would be $7 or 7%. but what if, during the same year, an average basket of goods that cost $100 increased in price to $103? ideally, what you were hoping for is that at the end of the year, you would receive your $107 and then buy a $100 basket of goods and you would be left with $7. but now your return is reduced to $4 since your $107 buys you a $103 basket and leaves you with $4.in this example, your nominal rate of return was 7%, but your real rate of return was only 4% because inflation was 3% over that time period:real rate of return = 7% - 3%real rate of return = 4%
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