Real terms

“In real terms” means the change in a financial number after correcting for the effect of inflation.

For example, if a company's revenues have increased 4% over the previous year, but prices were (on average) 2% higher than in the previous year, then its revenues have only increased 2% in real terms.

It can be very significant that positive reported growth numbers are flat or negative in real terms, sales growth numbers in particular. Apart from this, the most important real terms corrections for investors are real returns and real interest rate rates.

When calculating real terms numbers over longer terms (more than on year or other period), inflation must be compounded.

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