The Real Interest Rate
Nominal and Real 1-Year Interest Rates vs. Inflation
Interpretation
The real interest rate is calculated as the difference between the nominal interest rate and the inflation rate. The chart above displays the nominal interest rate of a 1-year US Treasury bond, the US inflation rate, and the resulting one-year real interest rate. Inflation is defined as the yearly percentage change of the Consumer Price Index (CPI). When inflation is high, prices for goods and services rise and thus the purchasing power per unit of currency decreases. The chart shows that, adjusted for inflation, the yields on US Treasuries (blue line) have often been negative.
Data Sources
- Nominal interest rate
- Robert Shiller Online Data: Nominal One-Year interest rate - from 1871 until 1929
- Capital Markets Data: Nominal One-Year interest rate - from 1929 until 1990
- Federal Reserve Bank of St. Louis: Nominal One-Year interest rate - since 1990
- Inflation
- Robert Shiller Online Data: CPI from 1871 until 1913
- Federal Reserve Bank of St. Louis: CPI since 1913
Further Information
- TradingView Chart: The Real Interest Rate
- Investopedia: What is a Real Interest Rate?
- Investopedia: What is Inflation?
- LongtermTrends: M2 Money Supply vs. Inflation
- LongtermTrends: US Treasury Yield Curve
- LongtermTrends: Bond Yield Credit Spreads
- LongtermTrends: Gold vs. Real Yields
The Expected Real Interest Rate
Interpretation
This chart provides a forward-looking view of the inflation-adjusted 10-Year Treasury Yield. It combines the nominal 10-Year Treasury Constant Maturity Rate and the 10-Year Breakeven inflation rate to calculate the 10-Year real interest rate. Because the nominal interest rate and the expected inflation rate span the same time frame, this measure of the real interest rate may be more accurate.
Interestingly, the 10-Year real interest rate is negatively correlated with Gold Prices.
Data Sources
- Federal Reserve Bank of St. Louis: Nominal 10-Year Treasury Constant Maturity Rate
- Federal Reserve Bank of St. Louis: 10-Year Breakeven Inflation Rate
- Federal Reserve Bank of St. Louis: 10-Year Real Inflation-Indexed Interest Rate