An investment offers a total return of 12 percent over the c

An investment offers a total return of 12 percent over the coming year. Alan Wingspan thinks the total real return on this investment will be only 8 percent.

What does Alan believe the inflation rate will be over the next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Inflation rate           %

Solution

Nominal Return = 12%
Real Return = 8%

Inflation Rate = (Nominal Return - Real Return) / (1 + Real Return)
Inflation Rate = (0.12 - 0.08) / (1 + 0.08)
Inflation Rate = 0.04 / 1.08
Inflation Rate = 0.0370
Inflation Rate = 3.70%

So, Alan believe the inflation rate will be 3.70% over the next year.