Interest income during inflationary times

There are two main areas of interest income during inflationary times – Real interest and Prime Interest

In order to protect its capital losses arising out of inflation the companies tend to raise the interest rate. The flow of income due to such increase in interest rates does not represent the true picture of actual income from interest margin.

Hence it become necessary to segregate inflation adjusted interest income from the total interest income. The inflation adjusted interest or more popularly known as the Prime interest is the amount necessary to keep the purchasing power of the monetary value of the principal of the financial asset. The remaining amount is the actual interest income of the business.

It is common practice to increase interest rates or benchmark them to some index to protect against loss of capital arising out of inflation.