Deflactar: How to protect your purchasing power against inflation and optimize your investment strategy

The inflation of 2022 has left a clear lesson: your money is no longer worth what it was a year ago. In Spain, it reached 6.8% in November, bringing with it a term that more and more investors are hearing: deflate. But what does deflating really mean, and how does it affect your investments?

The real problem: Inflation masks your gains

When comparing your income from one year to the next, you probably think you’re better off if the figure is higher. Wrong. Inflation distorts this reality. Economists know this well: you can’t simply compare numbers from different periods without considering how prices have changed.

Imagine a country’s GDP went from 10 million euros in year 1 to 12 million in year 2. At first glance, it seems like a 20% growth. But if prices rose 10% in that same period, the reality is different. Real GDP grew only 10%, not 20%. The difference between nominal and real figures is what economists call deflating: adjusting values to eliminate the effect of price changes and reveal the actual change in volume.

This adjustment is not academic. It has direct implications on how you understand your financial situation and the decisions you make as an investor.

What is deflating? Beyond theory

A deflator is a tool that compares a base period with subsequent periods, showing how prices have changed in that interval. When you apply a deflator to a figure, you get a “deflated” measure that reflects real, not inflationary, changes.

This concept is used constantly in economics: in GDP analysis, in company sales, in workers’ wages. Without deflating, you would be comparing apples to oranges—numbers from different eras with different price levels.

Deflating the IRPF: The fiscal measure that divides opinions

In Spain, the debate over deflating the (Personal Income Tax) (IRPF) has intensified. The proposal is simple: adjust the progressive tax brackets of the IRPF according to inflation so that taxpayers do not lose purchasing power when they receive salary increases.

Without this adjustment, the following can happen: if your salary rises 5% but inflation was 6%, you technically earned more money but lost purchasing power. Moreover, that nominal increase places you in a higher tax bracket, paying more taxes on an income that, in real terms, did not improve.

How does it work in other countries? The United States deflates annually, as do France and Nordic countries. Germany does it every two years. In Spain, at the national level, it hasn’t been done since 2008, although some autonomous communities have announced their adoption.

The two sides of the coin

Proponents argue that it is a legitimate protection against loss of purchasing power. Critics warn that it disproportionately benefits high incomes (due to the progressivity of the tax) and that it could reduce public revenues needed to fund essential services.

There is a more subtle argument: if you increase your purchasing power during high inflation periods, you could stimulate demand and, with it, push prices even higher. It’s a real economic dilemma.

Investment strategies in times of inflation and high rates

If IRPF is deflated, investors would have more disposable income. But how should you invest it in an environment of inflation and restrictive fiscal policies?

Commodities: The classic hedge

Gold is the traditional refuge. When inflation rises and money loses value, gold tends to maintain or even increase its value because it is not tied to any specific currency or economy. During periods of high interest rates, many investors migrate to gold because bonds no longer offer what they used to, and gold at least preserves purchasing power in the long run.

The warning: in short and medium terms, gold is extremely volatile. Historically it rises, but patience is key.

Stocks: The game of selectivity

Inflation and high rates are enemies of the stock market overall. They reduce investors’ purchasing power and dramatically increase borrowing costs for companies. Result: lower profits and lower stock prices. 2022 was proof of that.

But here’s the detail: not all stocks behave the same. Companies that sell products or services with inelastic demand (basic needs) or that benefit from inflation (such as energy companies, which posted record profits in 2022) can thrive while sectors like technology plummet.

During a recession, if you have liquidity and a long-term horizon, the stock market can be an opportunity. Recessions have historically been followed by recoveries. Buying cheaply when others are scared is the classic value game.

Currencies: Extreme volatility

The forex market reacts sensitively to changes in inflation and interest rates. High inflation tends to depreciate the local currency, which can make buying foreign currencies attractive. But beware: this market is highly volatile and supports leverage, meaning you can lose substantial sums quickly.

Diversification: Your best ally

Inflation impacts different assets in different ways. That’s why building a mixed portfolio—resilient stocks, defensive commodities, bonds, currencies—is essential to navigate without sinking.

Will deflating really impact your investment?

The financial reality is clear: tax savings from deflating the IRPF would be only a few hundred euros annually for an average person. It’s beneficial, yes, but not the panacea that moves markets.

Having more available income could increase demand for investments, especially those that generate returns (stocks, real estate). Specific sectors—green energy, technology—could receive additional flows if the fiscal incentive structure favors them.

But considering that the fiscal impact is modest, expecting that deflating the IRPF will transform the investment levels of a country is naive. It’s a marginal improvement in the overall scheme.

Final reflection

Deflating, in essence, is about seeing economic reality without inflationary noise. Whether in taxes, wages, or investments, it requires thinking beyond nominal numbers. In an environment of persistent inflation and high interest rates, this is not a luxury—it’s a necessity to protect your wealth and make rational investment decisions.