Fisher relationship
The real rate measures change in purchasing power, while the nominal or money rate includes the effect of inflation. Use the multiplicative relationship for exact calculations; nominal rate approximately equals real rate plus inflation only when the cross-product is immaterial. In appraisal, nominal cash flows belong with a nominal discount rate and real cash flows with a real rate. General inflation converts between the two bases, while individual revenues and costs may increase at different specific rates. The relationship is an analytical consistency rule, not a guarantee that observed rates exactly follow expectations.
Worked example
With an 8% real required return and 5% general inflation, the consistent nominal rate is 1.08 × 1.05 − 1 = 13.4%. Conversely, a 13.4% nominal rate and 5% inflation imply 1.134/1.05 − 1 = 8% real return.
Common mistake
Subtracting inflation from a nominal rate as though the additive approximation were always exact.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |