I remember well 2022, that year when everything changed in economic terms. Central banks raised interest rates unprecedentedly, and inflation reached levels we hadn't seen in decades. We all noticed in our wallets how our purchasing power was decreasing. That’s when a term started to become very common that many didn’t fully understand: what is deflating.

Basically, deflating is adjusting economic data to eliminate the effect of price changes. Imagine you want to compare how much your grandfather earned 30 years ago with what you earn today. If you only compare nominal numbers, it seems like you earn much more, but in reality, your purchasing power could be similar or even lower. That’s where deflating comes in. Economists use deflators to "clean" these data and see the reality without the noise of inflation or deflation.

In Spain, politicians had been debating for years about what it means to deflate the IRPF, especially when inflation hit 6.8% at the end of 2022. The idea was simple: if your salary increases but prices also rise, you shouldn’t pay more taxes just because of inflation. Adjusting the IRPF brackets according to inflation prevents you from losing purchasing power due to taxes.

What’s interesting is that in other countries they already do this. In the United States, they deflate the IRPF every year, just like France and Nordic countries. Germany does it every two years. But in Spain nationally, it hadn’t been done since 2008. Some autonomous communities implemented it afterward, but without national coordination, the effects were limited.

Now, why does this matter for investors? When you deflate the IRPF, people have more disposable income. That potentially means more capital to invest. Also, understanding what deflating is helps you better analyze your real returns. It’s not the same to earn a 10% nominal gain if inflation was 8% (real gain of 2%) than if inflation was 2% (real gain of 8%).

In high inflation scenarios, there are several strategies that work. Gold has historically preserved value when everything devalues, although it can be very volatile in the short term. Stocks suffer with high interest rates, but some companies resist better, especially those in defensive or energy sectors. In 2022, it was clear: energy stocks at all-time highs, technology stocks plummeting.

Diversification is key. Combining stocks, commodities, government-backed bonds, even forex if you have experience. Each asset reacts differently to inflation and interest rate changes.

One important thing: the real benefits of deflating the IRPF for the average person are not spectacular. We’re talking about savings of a few hundred euros. It’s not that everyone will suddenly start investing massively. But it does help maintain purchasing power and provides more room for investment decisions.

The fundamental lesson is to understand that nominal numbers are misleading. When you invest, when you save, when you compare your financial situation over time, you always need to mentally deflate, adjust for inflation. Only then do you see the true picture of your financial situation. And that’s the foundation for making smart investment decisions.