Can your balance rise while its purchasing power falls?

Choose what purchasing power means

Write down the starting date, ending date, currency, nominal balance basis, and price index. A return over one year and inflation over a different year do not make a coherent comparison. Neither does a price change for one personal purchase automatically measure a broad cost-of-living basket.

The St. Louis Fed explains the exact ratio of gross nominal growth to gross inflation and distinguishes it from the subtraction approximation. Here, real means adjusted for the chosen inflation measure only. The examples explicitly leave fees and tax outside the calculation so that the label cannot be mistaken for an after-tax result.

Work a positive purchasing-power case

Use invented inputs: an opening $1,000 becomes $1,080 over one year, while the selected price index rises from 100 to 105. The nominal return is 8%. Divide the closing balance by 1.05 to express it in starting-period purchasing-power units: $1,028.5714, or approximately $1,028.57.

The inflation-only real return is 1.08 ÷ 1.05 − 1 = approximately 2.8571%. Subtracting 5% from 8% gives 3%, which is an approximation, not the exact answer. Keep the distinction visible when percentages are material to the question.

Work a rising-balance, falling-power case

Change only nominal growth to 2%. The closing balance is $1,020. At the same hypothetical 5% inflation rate, its starting-period purchasing power is $1,020 ÷ 1.05 = approximately $971.43. The balance rose by $20 but purchasing power fell by about 2.8571%.

This does not say the account lost nominal dollars. It answers a different question about the amount of a specified basket those dollars represent. Preserve both readings rather than replacing one with the other.

Extend the worksheet with care

For several periods, use the price-index ratio between the actual start and end dates. With an invented two-year price path of 5% followed by 4%, the combined factor is 1.05 × 1.04 = 1.092, or 9.2% cumulative inflation. Adding the two percentages would produce a different number.

If there are contributions or withdrawals, a simple start-to-end balance ratio also mixes cash flows with investment results. Reconcile those flows before interpreting a real return. For a forward-looking illustration, an assumed inflation rate remains an assumption; it is not an observed adjustment and does not establish future purchasing power.

Method, sources, and limits

All balances and inflation values are invented. Exact ratios and rounded figures were checked using decimal arithmetic. The Federal Reserve Bank of St. Louis source was opened on 26 October 2026. No current inflation rate, market forecast, tax treatment, or personal spending basket is asserted. The worksheet explains measurement rather than recommending an asset.