Deflactor: The key tool to understand your investment during times of inflation

What is the deflator and why does it matter for your investments?

The concept of the deflator has become increasingly relevant as central banks maintain restrictive policies to combat inflation. A deflator is an indicator that adjusts economic values by removing the effect of price changes, allowing for the comparison of real data over time without inflationary movements distorting the analysis.

To understand it practically: if your company billed 10 million in 2021 and 12 million in 2022, it appears to have grown by 20%. However, if prices increased by 10% during that period, the real growth was only 10%. The deflator helps you separate the actual increase in activity from the mere effect of inflation on the numbers.

This measure is especially useful when analyzing Gross Domestic Product (GDP), wages, or the performance of your investments. Without a deflator, comparing returns across different periods is like measuring with a ruler that constantly changes size.

Deflating the Personal Income Tax (IRPF): How governments try to protect your purchasing power

In the context of 2022, where Spain experienced an inflation of 6.8% (November), Spanish authorities debated intensely about applying a deflator to the Personal Income Tax (IRPF).

What does deflating the IRPF mean?

It refers to adjusting tax brackets so that salary increases do not automatically push you into a higher tax category solely due to inflation. When your salary increases by 5% but inflation also rises by 6%, you technically have less purchasing power, but you would be taxed on a higher taxable base.

Countries like the United States, France, and Nordic nations already implement this adjustment annually. Germany does it every two years. Spain, at the national level, hasn’t done so since 2008, although some autonomous communities have announced their adoption.

The IRPF and its progressive structure

The Spanish tax system funds a large part of public spending through this direct tax on personal income. Its progressive nature means that the tax rate increases as income grows. Deflating the IRPF aims to prevent inflation from automatically increasing your tax burden without actually improving your economic situation.

Advantages and criticisms of this fiscal measure

Defenders of the deflator argue that it preserves the real purchasing power of families. In scenarios of accelerated inflation, without this adjustment, wage earners lose purchasing capacity in two ways: through direct inflation and increased tax pressure.

However, critics point out that it mainly benefits taxpayers with higher incomes (due to the progressivity of the tax) and that it could generate more inequality. Additionally, they argue that reducing tax revenues weakens funding for essential public services like education and healthcare.

Another argument is that maintaining purchasing power can stimulate demand, which paradoxically could put further upward pressure on prices.

Investment strategies in the face of inflation and restrictive policies

When high inflation and elevated interest rates converge, the returns of different assets behave very differently.

Commodities: gold as a refuge

Historically, gold acts as a safe haven during economic crises. When money loses value, gold tends to maintain or increase its purchasing power. Unlike treasury bonds (which generate IRPF taxation), gold does not produce yields but has long-term appreciation potential. The risk: in short- and medium-term horizons, its volatility is significant.

Stocks: selectivity in turbulent times

Inflation and high interest rates generally pressure the stock market, reducing corporate margins and increasing financing costs. 2022 demonstrated this: while energy companies hit record profits, the tech sector collapsed.

However, for investors with a long-term horizon and available liquidity, recessions can offer opportunities. Stocks are traded at significant discounts, and historically markets recover after periods of depression. The key is to identify resilient businesses: those that sell essential goods or benefit from economic uncertainty.

Forex: currencies and extreme volatility

The currency market reacts directly to inflation differentials. High inflation generally depreciates the local currency, making foreign currencies attractive. However, forex is the most volatile market and includes leverage: you can gain or lose disproportionate sums with small initial investments. It requires experience and rigorous risk management.

Bonds and safe securities

Treasury bonds and government-backed securities offer lower risk and inflation-adjusted yields. They are defensive alternatives but generate taxation that reduces net returns.

Diversification as a fundamental principle

Inflation impacts assets unevenly. A well-diversified portfolio — combining stocks, commodities, bonds, and currencies — distributes risks and capitalizes on opportunities across multiple fronts.

Real impact of deflating the IRPF on investments

If a deflator for the IRPF were implemented, the effects on investment would be:

Increased capital availability: Families would have more net income to invest, especially in income-generating assets (stocks, real estate).

Sectoral reorientation: Depending on how it is structured, it could incentivize investment in specific sectors like renewable energy or green technology.

Practical limitations: The average benefit for middle-class taxpayers is modest (hundreds of euros annually). Expecting this measure alone to revolutionize national investment levels would be naive.

Conclusion

Understanding what the deflator is essential for any investor in inflationary economies. Both at the public policy level (deflator of the IRPF) and in personal performance analysis, this tool prevents inflation from distorting your view of economic reality.

In moments of uncertainty like 2022, tax deflation helps preserve disposable income, but its real effects depend on how it is implemented and the investment decisions each person makes. Diversification, careful selection of inflation-resistant assets, and considering the fiscal impact on each investment remain the pillars of a solid financial strategy in volatile times.

Remember: no investment is risk-free, and values fluctuate constantly. Consulting financial experts before making significant decisions is advisable.