In economics, a real value refers to any value that has been adjusted for inflation. A nominal value is a value that has not been adjusted for inflation. Inflation here refers to the general increase in price levels.

Many will be familiar with inflation adjustments that are applied to GDP, wages, interest rates, security returns, and of course consumer prices and asset prices. The resulting data is usually referred to as “real (inflation-adjusted)” data.

Economic data is adjusted for inflation so that data measured over time takes into account the inflation rate over that time period, and removes the distortive effect that this inflation would have on comparisons of data points over time. Inflation is measured by calculating the rate of change in the prices of a basket of goods and services, such as a consumer price index (CPI) or a cost of living index (COLI).

However, the critical variable in any inflation adjustment is what inflation rate to use, and whether the calculation of this inflation rate and its methodology and resulting outputs can be trusted. Governments have a vested interest in generating a low inflation rate so that economies appear healthy and that inflation-linked government payouts in the form of pensions, social security, and inflation-linked debt will be minimized.

Central banks have a vested interest in a low inflation rate as it makes the purchasing power of their fiat currencies looks less weak than they actually may be, while hiding negative interest rates during low interest rate environments.

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