How does inflation affect simple interest calculations?

Inflation affects simple interest calculation by reducing the real value of the interest earned over time. As prices increase due to inflation, the purchasing power of the money earned in interest decreases.

For example, if you invest ₹10,000 at a 5% interest rate and inflation is 3%, your total interest earned after one year would be ₹500, bringing your total to ₹10,500. While the nominal value of the savings account has increased from ₹10,000 to ₹10,500, the real value of the savings has decreased due to inflation. This means that the real return on the savings account is not 5%, but 2% (5% - 3% inflation). Therefore, inflation reduces the purchasing power of money earned through simple interest.

Inflation will not affect the simple interest calculation if inflation is 0% or negative (deflation). In this case, the purchasing power of the money will remain the same or increase.