How the IRPF Deflation Affects Your Investment Portfolio During Inflationary Times

Fiscal Deflation as a Response to the 2022 Inflationary Crisis

The year 2022 marked a break in global economic policies. Inflation reached levels not seen in decades, forcing central banks in Europe and the United States to implement unprecedented interest rate hikes. In Spain, inflation hovered around 6.8% as of November 2022, significantly eroding the purchasing power of families and businesses.

In response to this reality, governments and monetary authorities activated restrictive policies. Among these measures, the deflacta of the IRPF stands out—a mechanism aimed at protecting taxpayers from losing purchasing power when their nominal incomes increase but are taxed at higher progressive rates.

What does deflacting mean in the current economic context?

Deflacting is a fundamental technical concept used to compare economic variables over time. It involves removing the effect of price changes (inflation or deflation) to identify only real changes in volume or productivity.

Let’s take a practical example: a country produces goods and services worth 10 million euros in Year 1. The following year, nominal production rises to 12 million. Without considering inflation, this might seem like a 20% growth. However, if prices increased by 10% during that period, the real growth was only about 10%.

This distinction is crucial. The nominal GDP of 12 million does not reflect the actual economic reality; the real GDP adjusted by the deflator is 11 million. This adjustment is especially relevant when working with data on wages, business profitability, or historical comparisons.

IRPF Deflacta: Protecting income in inflationary scenarios

The deflacta of IRPF specifically refers to adjusting income tax brackets of Personal Income Tax according to inflation. The goal is to ensure that a worker whose salary increases due to inflation does not end up paying more taxes proportionally.

Why is this adjustment important?

Without deflacta, an employee receiving a nominal salary increase of 5%—equivalent to inflation—would be pushed into a higher tax bracket. They would pay more taxes on income that, in real terms, has not improved. They lose purchasing power twice: due to inflation and higher tax burden.

In countries like the United States, France, and Nordic countries, deflacta is applied annually. Germany does it every two years. In Spain, at the national level, it has not been implemented since 2008, although some autonomous communities have recently started to adopt it.

The debate on benefits and limitations

Proponents argue that it protects the purchasing power of families, especially important during economic crises. However, critics point out two problems:

First, it creates inequality: taxpayers with higher incomes receive greater absolute benefits due to the progressivity of IRPF.

Second, it is economically contradictory: while curbing purchasing power reduces demand and controls inflation, restoring it can increase inflation. Additionally, lower tax revenues may affect funding for public services.

In practice, savings for an average person amount to hundreds of euros annually, limiting its macroeconomic impact.

Investment strategies amid inflation and restrictive policies

The combination of high inflation and elevated interest rates transforms the investment landscape. Different assets respond in various ways. If deflacta is implemented, investors would have more income to reinvest, potentially changing demand dynamics.

Commodities: safe haven in uncertainty

Gold is historically considered a safe asset during economic turbulence. When inflation rises and money depreciates, gold tends to preserve or increase its value, as it is not tied to specific economies.

In high-interest environments, it attracts investors seeking alternatives to government bonds, which generate higher fiscal burdens. Long-term, gold has consistently increased in value, though short- and medium-term periods can be highly volatile.

Stocks: opportunity during dips

Inflation and high rates generally pressure stock prices. They increase financing costs for companies and reduce investors’ purchasing power.

However, the impact is not uniform. Defensive sectors—energy, basic needs, utilities—can thrive. 2022 demonstrated this: energy companies hit record highs while technology collapsed.

For long-term investors with liquidity access, recessions are opportunities. Historical dips have been followed by recoveries and sustained growth. Buying during panic moments allows accumulating assets at depressed prices.

Forex: volatility with opportunities

The currency market is directly affected by inflation and rate changes. High inflation typically depreciates national currencies, making foreign currencies more attractive.

This market is highly volatile and carries high risk, especially with leverage. Exchange rates fluctuate due to economic conditions, political events, and market sentiment. It is not recommended for inexperienced investors.

Impact of deflacta on investment decisions

If IRPF deflacta is implemented, potential effects include:

Increased demand for investments: Additional disposable income would boost the search for yield-generating assets like stocks or real estate, improving after-tax returns.

Sectoral reorientation: If deflacta includes incentives for specific sectors (green energy, technology), investment flows would concentrate in those areas.

Risk considerations: No investment is risk-free. Diversification remains essential to navigate changing market conditions, combining low-risk assets (Treasury bonds), moderate (select stocks), and high-risk (forex, derivatives).

Final reflection

The IRPF deflacta is a defensive tool against the erosion of purchasing power during inflationary periods. Its implementation could free up capital for investments, especially in assets that historically outperform inflation: commodities, resilient company stocks, real estate.

However, its individual economic benefits are modest. The true strategy in times of uncertainty lies in smart diversification, asset selection based on investment horizon, and a clear understanding of how each category responds to inflation and interest rate changes.