Real and nominal returns: what a return buys after prices move

Two definitions from the Reserve Bank

The Reserve Bank of Australia’s glossary defines both terms from the borrower’s side.

Nominal interest rate: “the cost of borrowing money before adjustment for inflation … It is the cost visible to the borrower, and is composed of the real interest rate plus inflation.”

Reserve Bank of Australia, Glossary

Real interest rate: “the cost of borrowing money (i.e. the nominal interest rate) net of inflation.”

Reserve Bank of Australia, Glossary

The same entry names the other side as well: the real part, it says, “better reflects the economic cost of borrowing and the return to lending.” An investor who deposits money or buys a bond is on the lending side of that sentence.

How inflation is measured

The Reserve Bank’s explainer defines inflation as “an increase in the level of prices of the goods and services that households buy”, measured as the rate of change of those prices. Its best-known measure is the Consumer Price Index (CPI), which “measures the percentage change in the price of a basket of goods and services consumed by households”. The Australian Bureau of Statistics (ABS) works out the CPI and releases it monthly.

The explainer works an example with a basket of just two things, each with a weight that reflects how much households spend on it.

Childcare carries the larger weight because households spend more on it than on books, so the basket’s inflation sits much closer to childcare’s 4.7% than to books’ 2.5%. The real CPI does the same thing across 87 expenditure classes in 11 groups.

The latest reading, as at October 2026

In the 12 months to August 2026, the ABS reports, the CPI rose 4.0%, up from 3.5% in the 12 months to July, and trimmed mean inflation, a measure of underlying inflation, was 3.6%. That release came out on 30 September 2026; the ABS lists the next, for September, for 28 October 2026. Figures like these change every month, so the current one is on the ABS Consumer Price Index page.

Setting a return against the CPI

Here the two halves of the sum meet. The illustration below grows $10,000 for a year at the 3% rate Moneysmart uses in its compound interest example, then sets the result against a year in which prices rose 4.0%.

In dollars the balance grew by $304.16. In what it buys, it shrank: $10,304.16 at the end buys about what $9,907.85 bought at the start. The quick subtraction the Reserve Bank’s definition points to, 3.0 less 4.0, gives about minus one percentage point; dividing, as the sum does, gives minus 0.9%. Both say the same thing: a gain in dollars can be a loss in what those dollars buy. (This guide’s arithmetic.)

Moneysmart makes the same point in words. Cash carries a very low risk of losing money, it says, but rising prices may reduce what that money can buy over time, and it lists inflation risk, an investment’s value not keeping pace with inflation, among the risks that can affect an investment.

Is a figure before or after inflation?

Most figures in everyday use are nominal. A few places to look before reading a projection:

• Moneysmart’s compound interest calculator shows its results in future dollars, with no adjustment for inflation.
• Its managed funds fee calculator says its projected balance does not take the effect of inflation into account.
• A large figure decades out reads differently once the prices of those decades are counted. The sum above is one year long; while prices keep rising, the gap between nominal and real widens the longer a projection runs, because inflation compounds just as a return does (this guide’s reading).

What the CPI does not measure

The Reserve Bank lists the CPI’s limits plainly. It covers price changes in the metropolitan areas of Australia’s eight capital cities, not regional, rural or remote areas, and it “does not take into account the differences in spending patterns between individual households”. It measures the rate of price change, not the price level, and while it is often used to measure changes in the cost of living, the explainer calls it “not an ideal indicator of this”.

So the CPI is the standard figure for turning a nominal return into a real one, and it is an average. A household whose spending leans towards things that rose faster, housing for instance, which rose 5.7% in the year to August 2026, meets a higher rate of its own than the headline figure, which is the point of the Reserve Bank’s caution about individual households.