Real and nominal

In a monetary context, ‘real’ and ‘nominal’ are used to describe whether or not a price has been adjusted for inflation. Inflation means that money loses its value over time.

If a book cost £5 ten years ago, but £10 today, we would say its price has risen 100% in nominal terms. But had inflation risen by 100% at the same time, halving the value of money, we would say that the price has not moved in real terms.

Inflation has huge implications for investors and savers. The point of investing is to make a real return in order to increase the purchasing power of your assets over time. But many savers keep their money in accounts that pay them rates below the rate of inflation.

Say inflation is running at 2%. If you are getting an interest rate of 1.5% on your deposit account, you’re losing 0.5% in real terms. If you are getting 3% you’re making a real return of 1%. Most economic numbers are adjusted to take account of inflation – there is a distinction between real and nominal GDP, for example.

Merryn

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