The Fisher rule for real return after inflation
Real Return ≈ Nominal Return − Inflation
The nominal return is the headline rate your bank or broker quotes — for example, a 4.5% APY on a high-yield savings account. The real return is what you actually gain in purchasing power after accounting for inflation. The Fisher approximation (named for Irving Fisher) says real return is roughly nominal minus inflation. The approximation is accurate to within a tenth of a percentage point at typical rates; the precise formula (1+nominal) / (1+inflation) − 1 matters more in mac-1 and pfvi-7.
Why holding only cash quietly loses money
Cash in a 0%-interest savings account during 3% inflation LOSES 3% of purchasing power per year — even though the dollar number doesn't change. Inflation is the silent tax on savers who do nothing. The cure is not stuffing money under a mattress; the cure is owning assets whose value tends to rise with prices — index funds, real estate, and inflation-protected bonds (TIPS) all qualify. Compounding (from pf-2) and inflation are the two forces that decide whether your future self is richer or poorer in real terms.
Check whether your savings beat inflation
Why your personal inflation rate is not the headline number
Headline CPI is a single number, but your personal inflation rate depends on what you buy. Healthcare inflation typically runs around 5% per year while consumer electronics often deflate (prices fall) around 3% per year. If you spend heavily on healthcare and lightly on electronics, your personal inflation rate is higher than the headline. For the macro framing — how the Fed measures and responds to inflation — see mac-1 'Inflation: What It Is and Why It Matters'. For the value-investor view on holding cash during inflationary periods, see pfvi-7 'Inflation and the Cost of Holding Cash'.
Sit with the ideas.
Maya keeps $20,000 in a high-yield savings account paying 4.5% APY. CPI inflation is running at 3.2% per year. After one year (assume she doesn't deposit or withdraw), what is the real change in her purchasing power, and what is her account balance?