A few years ago, 2022 was that strange year when inflation ran out of control and central banks had to raise interest rates like never before. I still remember that feeling of watching prices climb everywhere, and how people lost purchasing power no matter how much they earned.

But here’s the interesting part: when you compare economic data from one period to another, you can’t simply look at the numbers exactly as they are. Inflation and changes in prices distort everything. That’s why the concept of deflation exists—basically adjusting those figures to remove the inflation “noise” and see what’s really happening.

Let’s imagine a country that produced 10 million in goods and services in one year, and the next year grew to 12 million. At first glance, that looks like 20% growth, doesn’t it? But if prices rose by 10% during that period, then the real, deflated growth is only 10%. That’s what economists are trying to do: see true growth without the distortion from price changes.

Now, this has direct implications for your pocket. In Spain, for example, there was a major debate about deflating the IRPF—the income tax. The idea was simple: if your salary goes up but only because of inflation, you shouldn’t pay more taxes. Tax brackets should be adjusted according to inflation so you don’t lose purchasing power. In the United States, France, and Nordic countries, they do this regularly, even annually. Germany does it every two years. But at the national level in Spain, it hadn’t been done since 2008.

The deflation concept is fundamental here. A salary that appears higher in nominal terms could be lower in real terms if inflation isn’t taken into account. Applying deflation to the tax system means acknowledging that reality.

Supporters say it’s fair: it prevents inflation from eating into your income through higher taxes. Critics argue the opposite—that it benefits higher earners more, because the IRPF is progressive, and that, in addition, curbing purchasing power is a tool for controlling inflation.

From an investment perspective, this changes things. If the state deflates taxes, people have more money available to invest. That could increase demand in stock markets, real estate, and commodities.

In high inflation, the typical strategy is diversification. Gold historically holds its value or rises when the currency loses purchasing power. Stocks suffer because high interest rates make business credit more expensive, but some companies (energy, basic necessities) tend to hold up better. In forex, inflation can depreciate the local currency, creating opportunities—even though it’s volatile and risky.

What many people don’t consider is that the tax benefit of deflation for the average person is modest—just a few hundred euros. It’s not as if everyone suddenly has massive capital to invest. It’s more of an adjustment to keep the tax system from absorbing nominal gains that are really just inflation.

In conclusion, understanding what deflated means is key to analyzing both your taxes and the real performance of your investments. It’s not the same to look at nominal numbers as it is to look at deflated figures that reflect economic reality. And in investment strategy, that mental adjustment is the difference between decisions based on illusions of profit and decisions based on real growth.