Definition of 'Inflation-Adjusted Return'
A measure of return that accounts for the return period's inflation rate. Inflation-adjusted return reveals the return on an investment after removing the effects of inflation.
It is calculated as follows:
Also, a simple approximation for inflation-adjusted return is given by subtracting the inflation rate from the rate of return.
Investopedia explains 'Inflation-Adjusted Return'
Removing the effects of inflation from the return of an investment allows the investor to see the true earning potential of the security, without external economic forces. For example, say an investor held a bond that returned 4% over one year. Examining only the return shows that this bond earned a positive income. However, if inflation for the year was 5%, the real rate of return on the bond becomes -1%.