Recently, someone asked me what deflating means and why I should care as an investor. The truth is, this concept is more relevant than many think, especially when we talk about inflation and how to protect our purchasing power.

The basic definition of deflating is simple: it is adjusting economic values to eliminate the effect of price changes. When economists talk about deflating, they refer to comparing real economic data, without being misled by inflation or deflation. Imagine your country produced 10 million in goods a year ago and 12 million this year. That sounds like a 20% growth, right? But if prices increased by 10%, the real growth was only 10%. That’s what deflating achieves: showing you the reality without the distortions of prices.

In the fiscal context, the definition of deflating becomes even more important. In Spain, for example, there are constant debates about deflating the personal income tax (IRPF) so that taxpayers do not lose purchasing power when they receive salary increases. If your salary goes up but you automatically move into a higher tax bracket due to inflation, you end up paying more taxes without actually earning more. Adjusting those brackets according to inflation is what is known as fiscal deflation. Countries like the United States, France, and the Nordic countries do this annually. In Spain, it hasn’t been done nationally since 2008, although some autonomous communities have started implementing it.

Now, what does this mean for our investments? If the IRPF is properly deflated, investors would have more disposable income. That could mean more capital to invest, potentially increasing demand for certain assets. But here’s the interesting part: inflation and restrictive policies affect different assets in different ways.

Let’s take gold. Historically, during periods of high inflation and high interest rates, gold behaves as a safe haven. When money loses value, gold tends to hold or increase its value because it’s not tied to any specific economy. In the short term, it can be volatile, but in the long term, it has proven to be resilient.

With stocks, it’s more complicated. Inflation and high rates generally pressure markets because they reduce purchasing power and make business financing more expensive. We saw this clearly in 2022: tech stocks plummeted while energy stocks hit record highs. But here’s the key: recessions are often opportunities for buyers with liquidity and a long-term horizon because markets tend to recover historically.

Forex also plays a role in inflationary scenarios. High inflation tends to depreciate the local currency, which can make buying foreign currencies attractive. But beware: forex is highly volatile, and leverage can amplify both gains and losses.

The strategy that works is diversification: combining assets that perform well during inflation (resilient company stocks, commodities, real estate) with defensive assets (bonds, Treasury securities). And always consider the tax impact on your returns.

One last thought: although the definition of deflating sounds important in political debates, the actual tax savings for an average person are modest, just a few hundred euros. So don’t expect a deflationary fiscal measure to radically change your investment capacity. What matters is understanding how your money works in different economic scenarios and adjusting your portfolio accordingly. At Gate, you can explore different assets and strategies based on these conditions. The key is to stay informed and flexible.