A few years ago, we experienced a brutal inflation that few expected. Central banks kept raising interest rates nonstop, and suddenly we all realized that our money was worth less. In that context, a term that many didn't fully understand started to sound familiar: deflating. And well, if you invest or simply take care of your wealth, it's worth knowing what a deflator is and why it matters.

Basically, a deflator is a tool used by economists to compare economic values over time by removing the effect of inflation. Imagine a country produces 10 million in goods one year, and the next year it produces 12 million. At first glance, it seems like it grew by 20%, but if prices increased by 10% during that period, the reality is that it only grew by 10%. That’s what a deflator does: adjusts the numbers to show real growth, not nominal. That’s why when you hear about real GDP versus nominal GDP, the concept of the deflator is behind it.

In the case of income tax in Spain, deflating refers to something similar but applied to taxes. When there’s high inflation, taxpayers receive nominal salary increases, but if tax brackets aren’t adjusted, they end up paying more taxes on income that doesn’t actually give them more purchasing power. Deflating the IRPF means adjusting those brackets so that people don’t lose purchasing capacity just because of inflation. In countries like the United States, France, and Nordic countries, they do this annually. In Germany, every two years. But in Spain, at the national level, it hadn’t been done since 2008 until recently.

What’s interesting is that understanding what a deflator is helps you think better about your investments. If there’s high inflation and restrictive policies, different assets behave very differently. Gold has historically maintained value during inflationary crises because it’s not tied to any specific economy. Stocks suffer because financing costs for companies rise, although there are exceptions: sectors like energy can shine while tech sinks. Forex becomes volatile because exchange rates react to inflation.

The reality is that if IRPF is deflated, taxpayers would have more money available, which could increase demand for investments. But it’s not magic: savings are only a few hundred euros for most people. What’s important is that you understand how the deflator works in the economy to make better decisions with your money. Diversifying among assets that resist inflation, considering the tax impact on your gains, and maintaining a long-term vision is what truly matters when everything becomes volatile.