A few years ago, soaring inflation forced us to rethink how to protect our money. In Spain, we reached peaks of 6.8%, and European governments started talking about a fiscal measure that many of us are unaware of: deflating. But what exactly is deflating, and why should it matter to you as an investor?

Basically, deflating is an economic concept that means adjusting economic values by removing the effect of inflation to see the real growth. Imagine your salary increased by 5%, but inflation was also 5%. In nominal terms, you earned more, but in purchasing power, you stayed the same. That’s where deflating comes in: normalizing those numbers to compare apples to apples over time.

In the fiscal sector, deflating takes on another meaning. When we talk about deflating the personal income tax (IRPF), we mean adjusting the tax brackets according to inflation so you don’t end up paying more taxes just because your nominal salary increased. That is, if your salary rises due to inflation but not due to real productivity, you shouldn’t pay more taxes. Sounds logical, right?

The thing is, many countries already do this. The United States deflates annually, as do France and Nordic countries. Germany every two years. In Spain, it hasn’t even been done nationwide since 2008, although some autonomous communities have recently implemented it.

Now, what does this mean for your investments? If the IRPF were properly deflated, you would have more money available to invest. That sounds good in theory, but here’s the interesting part: the real benefits for an average person are modest. We’re talking about savings of a few hundred euros a year, not revolutionary changes.

That said, the inflationary context does affect how you should invest. During periods of high inflation, certain assets perform better. Gold has historically maintained value when the currency depreciates. Shares of energy companies or basic goods tend to resist better. Government bonds lose appeal because their fixed yield erodes with inflation.

Diversification is key. You can’t bet everything on a single type of asset when inflation is at play. You need a mix: something that grows with prices, something defensive, something with long-term potential. And yes, you have to consider taxes in your calculations of real returns.

The conclusion is that understanding what deflating is and how it works helps you see beyond nominal numbers. It allows you to identify whether you’re truly making money or just keeping pace with inflation. And that’s essential for making smart investment decisions in any economic context.