Inflation and your savings: the real return on 4%

A savings account paying 4% sounds like a 4% return. It is a 4% return in dollars. Whether it is a return in what the dollars buy depends on a second number, and in the twelve months to August 2026 that number was 3.4% — the rise in the Consumer Price Index reported by the Bureau of Labor Statistics on September 11.

The correct subtraction is a division

Wealth Signal calculation

4% nominal against 3.4% inflation is 0.58% real, not 0.6%
Real return = (1 + nominal) ÷ (1 + inflation) − 1 = 1.04 ÷ 1.034 − 1 = 0.58%. Subtracting gives 0.6%, which is close at these rates and wrong at higher ones: 10% against 8% is 1.85% real, not 2%. The lesson on nominal and real covers why.

Then tax

Interest is taxed as ordinary income, and it is taxed on the nominal amount. The inflation component is not exempt. Someone in the 22% federal bracket keeps 3.12% of a 4% rate before state tax.

A 4% savings rate, 3.4% inflation, 22% federal tax
Step	Rate
Nominal interest	4.00%
After 22% federal tax	3.12%
Real, after tax: 1.0312 ÷ 1.034 − 1	−0.27%

Wealth Signal calculation. State tax would push the last line further below zero; a T-bill's state exemption would not change the federal line.

The last line is the one to sit with. At the rates prevailing in September 2026, cash in a good savings account, after tax, bought slightly less at the end of the year than at the start. Not much less — a quarter of a percent — but not more.

What this does and does not mean

It does not mean cash is a mistake. An emergency fund is held for a reason that has nothing to do with return.
It does mean that money held in cash for years, as a long-term store, has been losing ground slowly, and would need a higher rate or lower inflation to stop.
It does not say anything about next year. Both rates move. The inflation figure is published monthly; the account rate changes whenever the bank changes it.

Fact

Inflation is measured on a basket; the reader's basket differs
The 3.4% is the change in the price of the goods and services an average urban household buys, weighted by how much of each. A household that rents in a city where rents rose 6% experienced more inflation than the index; one that owns its home outright with a fixed mortgage experienced less. The real return on savings is personal, and the index is the starting point.

The nominal-to-real division is the same one that makes a 6% pay rise in a 3.4% year into a 2.5% real rise — a calculation worked through on this site with the August figures.

Education, not advice. This guide explains how a rule works and what it costs. It does not know your income, your state or your situation, and Wealth Signal does not publish recommendations. Tax figures are the 2026 federal amounts on the date shown in the sources. Full disclaimer.

Inflation and your savings: 4% interest against 3.4% inflation is a real return of 0.6%

The correct subtraction is a division

Then tax

What this does and does not mean

Sources