I’ve been reviewing how deflation actually works in economics, because it’s a concept that many investors ignore, but it directly affects our financial decisions. Essentially, deflation in the economic context means adjusting nominal values to remove the noise from inflation and see what’s really happening with growth.

Look, for years we’ve seen governments debate whether to deflate income taxes to protect their citizens’ purchasing power. In Spain, for example, the debate was intense when inflation was around 6.8% toward the end of 2022. The idea is simple: if your salary increases by 5% but inflation is 6%, you’re technically losing money. So deflating the IRPF means adjusting the tax brackets so you don’t end up paying more taxes on income that doesn’t actually make you richer.

What’s interesting is that countries like the United States, France, and the Nordic countries already do this annually. In Germany, it’s every two years. But in Spain here, at the national level, it hadn’t been done since 2008, although some autonomous communities began implementing it. The central point is to understand that deflation meaning goes beyond just fiscal policy—it has real implications for how we invest our money.

Economists use deflators to compare the real performance of a company, region, or person over time. Without this adjustment, we confuse nominal growth with real growth. For example, if nominal PIB rises from 10 to 12 million but prices rose by 10%, real growth was only 10%, not 20%. This difference between nominal PIB and real PIB is crucial for making the right investment decisions.

Now, what does this mean for us as investors? If the IRPF is deflated, taxpayers have more disposable income, which theoretically would increase demand for investments. But here’s the reality: the economic benefits for an average person are limited—we’re talking about hundreds of euros saved, not thousands.

In a high-inflation environment with elevated interest rates, most traditional assets suffer. Stocks sink because credit for companies becomes more expensive. Bonds lose appeal. But there are exceptions. Gold has historically maintained value in these times, even if it’s volatile in the short term. Commodities in general may benefit because their prices rise with inflation. And some specific sectors, like energy, can generate record profits while others, like technology, fall apart.

What many people don’t consider is the tax impact on their gains. If you invest in stocks and get profits, those returns are taxed under the IRPF. So understanding how deflation meaning works in the context of your taxes is essential for calculating your real return after tax.

My recommendation: in times of high inflation, diversify. Don’t rely only on stocks or only on bonds. Consider gold, commodities, and real estate. And yes, keep an eye on how your country implements—or doesn’t implement—these fiscal deflation policies, because they definitely affect your real purchasing power in the long run. The stock market may look like a disaster in the short term during a recession, but historically it recovers. Those with liquidity and a long-term horizon may be buying assets at prices they won’t see again.