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i use the formula 100/(1+r)^T to calculate the present value of my future money while r is interest rate and T is year.

However , for my country , interest rate (year) = %8.25 and inflation rate (year) = %12.60

Is it logical if i use inflation rate instead of interest rate at my calculation?

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  • $\begingroup$ It would make more sense to use real interest rate - if we are talking about money in some interest bearing account $\endgroup$ – 1muflon1 Jul 25 at 19:29
  • $\begingroup$ @1muflon1 i edited the question. can you comment this version? $\endgroup$ – M.SEL Jul 25 at 20:00
  • $\begingroup$ You can choose whatever you want for your own analysis. Interest rates are typically used as they represent the cost of financing something, or for comparing investment value versus bonds. You cannot directly purchase the CPI, so its change is of interest, but not an investment alternative. $\endgroup$ – Brian Romanchuk Jul 25 at 20:03
  • $\begingroup$ The same comment stands - if you are for example contemplating some problem like someone offers you 100USD now vs 150USD next year you should use real interest rate to calculate the present val. of 150USD because not only in the first scenario you get the money now before they become less valuable due to inflation but at the same time you can put them to some account that will bear interest hence you should take into account both nominal interest rate and inflation which is done by using real interest rate $\endgroup$ – 1muflon1 Jul 25 at 20:09
  • $\begingroup$ @1muflon1 yes. let me calculate real interest rate is 8.25 - 12.60 = - %4.35 . Even i bear the interest of my present money , it will not be compansated from the effect of inflation. So is it more precise to calculate present value with inflation rate instead of interest rate? $\endgroup$ – M.SEL Jul 25 at 20:23
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The question has some ambiguity. If you want to calculate something, you need to define what you are interested in. If you want to think in terms of purchasing power, you can use the inflation rate.

However, using inflation would be the wrong answer in the context of finance or project analysis. In the financial context, you are comparing money now versus money in the future. The basis of comparison is an instrument that bridges money from the present to the future, which are debt instruments.

For example, if you are borrowing to finance a project, your profitability depends on the return of the project in nominal terms versus the cost of financing. What the value of the currency does versus a basket of goods during that time does not matter.

The idea of inflation trading off future returns is a beloved concept of conventional economists, but its usefulness is greatly overrated. Since you cannot purchase the CPI basket and store it indefinitely, there is no obvious necessary relationship between inflation rates and the return on investable assets. (People might invoke model relationships, but that puts a lot of faith in the models.)

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