Recently, I was reviewing how inflation continues to be a key factor in investment decisions, and a concept came to mind that many ignore: deflating and its true meaning in our finances. It’s not just a technical term for economists, but something that directly affects your purchasing power.

The thing is: when prices rise uncontrollably, comparing numbers from one year to another becomes misleading. If your salary increased by 5% but inflation was 8%, you technically earned more, but in reality, you lost purchasing power. This is where deflating, as a key concept, comes into play. Economists use deflators to remove the inflation noise and see what has actually grown.

Let’s take a simple example. A country produces 10 million in goods one year, and the next year it rises to 12 million. Sounds like 20% growth, right? But if prices increased by 10%, the reality is that the economy only grew by 10%. The nominal GDP says 12 million, but the real GDP (adjusted for inflation) is 11 million. That’s deflating in action.

Specifically in Spain, there is constant debate about deflating the IRPF. The idea is to adjust tax brackets according to inflation so that taxpayers don’t lose purchasing power when they receive salary increases. If your salary goes up but you’re pushed into a higher tax bracket just because of inflation, you’re effectively worse off. Countries like France, the United States, and Nordic countries already do this annually. Germany every two years. Here, it’s not as systematic.

Those who defend deflating the IRPF as a concept say it protects families. Critics argue it benefits higher earners more (due to the progressive tax system) and that curbing purchasing power is better for controlling inflation. It’s a valid debate.

Now, how does this affect your investment strategy? If the government deflates taxes, you have more money available to invest. That’s obvious. But there are more nuances. During periods of high inflation, certain assets perform better: commodities like gold retain value, stocks of energy and basic goods companies resist better, while tech suffers. Diversification is key because inflation hits sectors differently.

Forex also becomes interesting when inflation is high because exchange rates move with inflation differentials between countries. But beware: it’s volatile and requires experience.

The truth is, understanding the meaning of deflating helps you read economic numbers better. It’s not just a technical adjustment; it’s the difference between knowing if you’re truly gaining or losing. And that definitely matters when making decisions about where to invest your money.