What Is the Fisher Equation?

The Fisher equation states that the real interest rate equals the nominal interest rate minus the inflation rate. It is named for the economist Irving Fisher and gives a clearer picture of interest rates by taking the effect that inflation has on purchasing power into account.

As an example, if a bank offers an annual nominal interest rate of 10 percent on a savings account, that account will have 10 percent more money in it after a year. If the inflation rate for that year is 8 percent, then the true picture of how much interest the savings account earns is closer to 2 percent, since 10 minus 8 equals 2; this is the real interest rate.