The real rate of return is given by:
and it can easily be shown that:
1+r ≈ i-π+1 so that r ≈ i-π
This can be used to calculate real rates of return, or equivalently the real debt burden multiplying across by previous year debt D_(t-1):
However, some economists use expected inflation, rather than actual inflation to do this, which I don't understand. If an investor has a required rate of return, expected inflation is the appropriate indicator used to meet that RRR. So if I want a return of 10%, and I believe inflation will be 2% then I charge a nominal of 10% on a loan: r= i - expected inflation. 5-year average of inflation would be useful for that. But if we want to see what rate of real return was actually realised, looking back or ex post, then it is r=i-inflation. So I don't understand why in the above equation for the real burden of servicing debt, one would use expected inflation. That seems to be measuring what the real debt burden of servicing debt would be if inflation turned out as expected, not what the real burden actually was. I discussed the real debt burden on this forum recently. Can anyone clarify?