Calculating returns: How much is left after inflation?

Calculating a return means turning the initial and final value of an investment into a percentage. Behind this are four different figures: total return and annual return, each before and after inflation. Anyone comparing two returns therefore needs to know which type and which period they refer to. Examples in Swiss francs show the differences.

Calculating returns: four returns at a glance

Every return answers two questions. First, over what period does it apply? Second, has inflation already been deducted? This gives four figures. Total return is also called cumulative, meaning it is added up over the whole period. Why investors expect a return for the risks they take on at all is a separate topic. This article is about how to read the figure.

How are the years taken into account?

Total return is quick to calculate. In a freely chosen example, CHF 10,000 becomes CHF 12,000, so 12,000 divided by 10,000, minus 1: plus 20%. The figure does not reveal how long this took. That is what annual return is for.

It is the constant annual rate that leads from the initial value to the final value. The technical term is annualised return, also known in finance as CAGR (compound annual growth rate). CAGR is a special case of the geometric mean and is suitable when the initial and final values are known. Geometric means that the years are not added but multiplied.

An example with freely chosen values: CHF 10,000 becomes CHF 12,100 in two years. The total return is 21%. Per year, it is 10%, because 1.10 × 1.10 = 1.21. Each year, the rate applies to the amount that has already grown, not just to the starting amount.

Percentages do not add up

Adding annual rates together can easily lead to the wrong result. A short example shows why.

The simple average is called the arithmetic mean. Annual return is the geometric mean. In addition, a loss of 10% requires a rise of around 11.1% to get back to the starting value. The loss affects the smaller amount.

How much is left after inflation?

Nominal return counts francs. Real return counts what those francs can buy.

According to the ECB, the nominal interest rate is the rate agreed between lender and borrower. The real interest rate additionally takes into account how much purchasing power the money loses as prices rise. As a rule of thumb, the ECB gives the real interest rate as the nominal interest rate minus inflation. In its example, a nominal interest rate of 2.5% and a price increase of 3% result in −0.5%. The exact figure is −0.49%. The example concerns a savings rate in euros, but the calculation can be applied to returns.

The exact formula is a division: real return = (1 + nominal return) divided by (1 + inflation), minus 1. With freely chosen values, 5% nominal and 2% inflation give 1.05 ÷ 1.02 − 1 = 2.94%, slightly less than the 3% of the approximation. With small annual rates, the difference is minor.

Inflation in Switzerland

The FSO compiles the CPI and, in its German-language publications, refers to inflation as Teuerung. Average annual inflation is the change in the annual average compared with the previous year. The annual average is the mean of the twelve monthly index values. There is also the change from December to December.

Source: FSO press releases on the CPI. Data as of 8 January 2026. Past performance is not a reliable indicator of future results.

Both measures are correct, but they measure different things. Compounding the five annual averages gives a price increase of around 7.0% over five years, or around 1.4% per year (own calculation based on the rounded FSO figures). Simply adding the five rates would give only 6.8%. Germany and Austria have their own price indices.

Two investments, same total return, different result

A numerical example shows how the length of the period and inflation interact.

Both investments reach plus 20%, but their annual returns are far apart because B takes six years. Inflation has an effect in each of these years. Of the CHF 12,000 for B, CHF 10,656 remains in today's purchasing power.

The approximation «nominal minus 2%» gives around 4.3% instead of 4.2% for A and around 1.1% for B. Applied to totals over several years, it becomes inaccurate: 20% minus 12.6% would give 7.4% instead of the exact 6.6%. It is therefore only suitable for small annual rates. In the calculator below, the amounts, period and inflation can be changed.

Risks and limitations

• Costs and taxes: The formulas include neither. Costs and taxes reduce the return, tax treatment differs from country to country, and individual circumstances may vary.
• Payments during the term: Deposits and withdrawals between the start and the end require other methods.
• Inflation as an average: The inflation an individual experiences may differ from the CPI. The annual average and the December figure can also diverge, as in 2021 (+0.6% compared with +1.5%).
• Smoothing and losses: Annual return spreads the result evenly, while individual years can fluctuate sharply. A return can be negative. The examples only show the logic of the calculation and are not an expectation.
• Foreign currencies: The examples are calculated in francs only. With other currencies, the exchange rate is an additional factor, as the article on the SNB policy rate shows with a numerical example.

Conclusion

When calculating returns, total return shows the gain or loss over the whole period, while annual return takes the length of the period into account. Real return deducts inflation and shows the change in purchasing power. In the example, two investments each achieve 20%, but with inflation of 2% per year, around 4.2% and around 1.1% per year remain. Costs, taxes and payments during the term are not included in these formulas.