Deflactar: The key financial concept that transforms your investment strategy during times of inflation

The Current Economic Context: Why Deflating Has Become an Urgency

The year 2022 ended marking a before and after in Western economies. After decades of expansionary policies, central banks in Europe and the United States implemented historic interest rate hikes in response to record inflation. In Spain, inflation reached 6.8% in November of that year.

When prices of goods and services rise uncontrollably, consumers feel it directly in their wallets. High inflation equates to a loss of purchasing power: money is worth less. To curb this phenomenon, governments apply restrictive fiscal policies: raising interest rates, reducing public spending, and increasing taxes. The goal is to slow down the economy and contain the price spiral.

However, there is a less known but effective measure: deflating. This fiscal strategy adjusts the income tax brackets of IRPF (Personal Income Tax) according to inflation, ensuring that a salary increase does not automatically imply a higher tax burden. In other words, deflating protects your purchasing power even when your nominal income grows.

What does deflating mean in technical terms?

Deflating is a fundamental economic concept that allows for honest comparison of financial variables over time. A deflator is the index that expresses changes in prices over a given period for a product or a basket of products. Its function is to eliminate the “noise” that inflation introduces into data, leaving only the real growth visible.

The classic example: Imagine a country produced 10 million euros worth of goods in Year 1. The next year, production rose to 12 million. At first glance, this seems like a 20% growth. But if prices increased by 10% in that same period, the reality is different. When normalized considering inflation, the real growth was only 10%.

This difference between nominal GDP (12 million) and real GDP (11 million after deflating) is crucial for investors and analysts. Without this adjustment, it’s impossible to distinguish between true economic growth and simply higher prices.

Deflating is not just academic: it applies to business sales, real wages of workers, and especially, to your tax base.

Deflating the IRPF: the fiscal measure that changes the tax game

The debate about deflating the IRPF gained relevance in Spain precisely because it directly affects families and workers. When an employee receives a salary increase in an inflationary context, their nominal salary rises but their purchasing power might stay the same or fall. This happens because, without deflation, the progressive tax brackets of IRPF do not adjust, forcing them to pay more taxes even if their real situation has not improved.

Deflating the IRPF means reducing the tax burden by adjusting these brackets according to inflation or income increases. It is a measure aimed at ensuring that workers who get a raise do not lose purchasing power by paying more taxes.

Why is this important? In Spain, this adjustment has not been made at the national level since 2008. Meanwhile, countries like the United States, France, Germany, and Nordic nations regularly deflate their fiscal systems. Currently, some Spanish autonomous communities have adopted this measure, although the central government still does not implement it systematically.

It’s important to note that this is not considered a “tax cut,” but a defensive adjustment. The taxpayer will only notice it when filing their income tax return.

Advantages and controversies of deflating

Supporters argue:

• Protects the purchasing power of working families against inflation
• Maintains horizontal equity: two people with the same real income pay similarly
• Allows available spending to stay stable, supporting investment demand

Critics argue:

• Creates inequality: higher brackets receive greater absolute benefits due to tax progressivity
• Restoring purchasing power increases demand, which can push prices up again
• Reduces fiscal revenues, limiting funding for public services like education and healthcare

The reality is that practical effects are moderate: an average person would save a few hundred euros, insufficient to change investment decisions at a macro level.

How to leverage inflationary scenarios: proven investment strategies

If IRPF deflation were implemented, taxpayers would have more disposable income, which theoretically would increase demand for investments. Regardless, in high inflation and high interest rate environments, there are assets and strategies that have historically worked:

Gold and commodities: classic refuge

Gold is the traditional refuge during economic and inflationary crises. Unlike national currencies, it is not tied to any specific economy. When money loses value, gold tends to preserve or increase its own. In environments of high interest rates, where government bonds do not offer attractive after-tax yields, gold represents an alternative that does not generate interest but has long-term appreciation potential.

Warning: although historically gold has always increased in value over the long term, in short- and medium-term horizons it can be extremely volatile.

Stocks: opportunity in volatility

High inflation + high interest rates = hostile environment for stocks. Investors lose purchasing power, and companies face higher costs for financing operations and expansion. Result: lower profits and depressed stock prices. 2022 was a vivid proof of this, especially in technology.

But here comes the opportunity: not all companies suffer equally. Those producing essential goods or demanded services in uncertainty tend to resist better. Energy companies in 2022 posted record profits while technology stocks plunged.

For investors with liquidity and a long-term horizon, recessions offer historically low purchase prices. The stock market has recovered consistently after major declines, even if the first months or years are turbulent.

Forex: profitable volatility for advanced traders

The currency market reacts sensitively to changes in inflation and interest rates. High inflation typically depreciates the national currency, making it attractive to buy foreign currencies that can appreciate.

Caveat: forex is the most volatile and risky market, especially with leverage. Exchange rates fluctuate according to economic conditions, political events, and market sentiment. Only experienced investors should venture here.

Real estate: tangible asset in inflation

Although not extensively detailed, real estate assets have historically generated positive returns during prolonged inflation, as they tend to increase in value as overall prices rise. Diversification is crucial: combining real estate with selective stocks, gold, and strong currencies reduces systemic risk.

Deflating your portfolio: final considerations

Deflating is much more than a political debate. It is a concept that explains why your portfolio needs specific strategies in inflationary times.

If IRPF deflation were implemented in your country, it would result in:

• More available income for investment
• Greater potential demand for income-generating assets
• Possible reorientation toward fiscally incentivized sectors (green energy, sustainable technology)

The key is understanding that high inflation and interest rates require active asset selection. There is no single solution: gold preserves value, stocks offer cheap buying opportunities during crises, forex multiplies returns for experts, and real estate maintains purchasing power.

No investment is free of risks. Values fluctuate. But understanding deflating — both fiscally and in investment — is the first step to protecting your wealth in inflationary economies.