Quick Lesson In The Real Interest Rate

For those of you who haven't had much finance, you might not be familiar with what's called the "real interest rate," but it's essentially the interest rate if you were to factor out inflation. The basic equation is as follows (π = the inflation rate):

(1 + R_real) = (1 + R_nominal)/(1 + π)

Given current 1-year interest rate of about 2% and the current inflation rate of about 4% annually, we're looking at roughly a -2% real interest rate. So basically, if you invest $100 today, a year from now you'll have what's roughly equivalent to $98. It's kind of a sad thought really, however, if it's any consolation it likely won't last too long - knock on wood. Yet, it does shed light onto just how realistic a threat inflation is currently. So next time you're ready to criticize the Fed for not cutting rates*, consider this situation, because I for one feel as though they're certainly justified in their concerns with inflation.

*Lowering interest rates creates inflation (maybe I'll give you all an Econ lesson on how this happens in the near future)