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What is real rate of return?

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The consumer price index (CPI) inflation, which measures rise in items of basic necessities, was reported at six-month high of 6.3% in May 2021. How does this impact your investments? The real return that you make from your investment goes down due to inflation. This comes after accounting for price rise in items like food, housing, clothing, healthcare, education. Inflation measures the price rise of items over a year (that is, compared to May last year in above case). If investment returns are less than inflation rate, it means your real rate of return is negative. This doesn’t mean to suggest that you should make aggressive investments, but over time, your returns should take care of inflation.

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