The question
"My fund went up 4% this year. But everything at the store costs more too. Did I actually get ahead?"
The idea
- Inflation is the rise in prices over time. When prices rise 3.7% in a year, $100 buys what $96.40 bought a year earlier.
- So a return has two versions:The nominal return is the one on your statement: how many more dollars you have.The real return is what those dollars can buy: the return after taking inflation out.
- The quick way: real return ≈ return − inflation. The exact way: divide, (1 + return) ÷ (1 + inflation) − 1. For small numbers, the two land close together.
Worked example
The inflation number. The US government measures inflation with the Consumer Price Index (CPI): the price of a fixed basket of what households buy. In September 2025 the index stood at 324.800. In September 2026 it stood at 336.940.
Step 1. Inflation = 336.940 ÷ 324.800 − 1 = 3.7% over those 12 months.
That is the latest official year. The fund returns below cover Nov 10, 2025 to Nov 10, 2026, five weeks later: close enough to learn the idea.
Step 2. Three ways to hold $10,000 for that year, with total return (Cash or invested):
| Held as | Total return | Dollars at the end | Quick real return | What it buys, in last year's dollars |
|---|---|---|---|---|
| Cash in a drawer | 0% | $10,000 | 0 − 3.7 = −3.7% | $9,640 |
| BIL (Treasury bills) | +3.7% | $10,367 | 3.7 − 3.7 = about 0% | $9,993 |
| SPY (S&P 500) | +11.2% | $11,123 | 11.2 − 3.7 = about 7.5% | $10,723 |
Step 3. The last column is the exact way. For SPY: $11,123 ÷ 1.037 = $10,723, a real return of 7.2%. The quick way said 7.5%. Trust the exact one; the shortcut drifts as numbers grow.
Step 4. Read the middle row again. BIL's dollars grew by $367, and it bought almost exactly what $10,000 did a year earlier. Cash funds often do this: their job is to keep pace, not get ahead.
Watch which return you read. A fund's price chart shows only the price. ETFIQ prints both.
Over the same year, SPY's price rose 10.0% while its total return was 11.2%. For a cash fund, the gap is everything: SGOV's price rose 0.1%, but its total return was 3.8%. Take inflation out of the price alone and SGOV looks like it lost 3.6%. It didn't.
The common mistake
"My money is safe in cash, so I'm not losing anything." The dollars are safe. What they buy is not. In this year, $10,000 left in a drawer bought about $360 less.
The second mistake runs the other way: judging a fund by its price chart. For anything that pays cash, price leaves out part of the return. Take inflation out of price alone and the fund looks worse than it was.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. What is a real return?Answer: D. The return after taking out inflation: what your money can buy. real return measures buying power, not dollar count. Not A: the statement shows the nominal return, before inflation.2. A bond fund returned 5.0% over a year in which prices rose 3.7%. About what was its real return?Answer: C. About 1.3%. 5.0 − 3.7 = 1.3 points of extra buying power. Not A: inflation is taken out, not added on.3. Over a year, a cash fund's price rose 0.1% and its total return was 3.8%. Prices rose 3.7%. What happened to its buying power?Answer: B. It about kept pace. total return (3.8%) minus inflation (3.7%) is about zero. Not A: that uses the price alone and leaves out the interest the fund paid.
Takeaways
- Take inflation out of every return before you call it a gain.
- Use total return, never price alone, for any fund that pays cash.
- Expect a cash fund to keep pace with prices, not get ahead of them.