Let€™s see just how much high expected inflation can hurt incentives to save for the long run. Let€™s assume the government takes about one-third of every extra dollar of nominal interest you earn (a reasonable approximation for recent college graduates in the United States).You must pay taxes on nominal interest€”just like under current U.S. law€”but if you€™re rational, you€™ll care mostly about your real, after-tax interest rate when deciding how much to save.
To make the economic lesson clear, note that in every case, the real rate (before taxes) is an identical 3%. In each case, calculate the nominal after-tax rate of return and the real after-tax rate of return. Notice that as inflation rises, your after-tax rate of return plummets.

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2/3 x i Nominal Nominal Interest Rate (no surprises) After-Tax Return Return Inflation Real After-Tax 15% 6% 12% 90% 900% 12% 396 9% 87% 897% 10% -2%