I have been reviewing how inflation and restrictive fiscal policies impacted the markets a few years ago, and there is a concept that many investors overlook: fiscal deflation. Let me explain why this matters for your portfolio.

Basically, deflating is adjusting economic figures to eliminate the noise of inflation. When comparing the performance of your investments or your salary across different periods, you can't just look at the nominal numbers because inflation tricks you. A classic example: if a country produces 10 million in goods in year 1 and 12 million in year 2, it looks like a 20% growth, but if prices increased by 10% during that period, the real growth was only 10%. That is the deflated value.

Now, in high inflation contexts like what we saw in 2022 (with Spain around 6.8%), governments started debating deflating the IRPF. The idea is that when your salary increases due to inflation, you shouldn't pay more taxes just because your nominal income went up. If tax brackets aren't adjusted, you end up losing purchasing power even though you technically earn more. I find that quite unfair.

In the United States, France, and Nordic countries, they already do this annually. Germany every two years. But Spain hasn't applied this at the national level since 2008, although some autonomous communities have considered implementing it. The debate is interesting: supporters say it protects families' purchasing power, while critics argue it benefits higher earners more (due to the progressive tax system) and that reducing taxes during inflation can further boost demand and prices.

For investors, this has real implications. If IRPF is deflated, you have more disposable income to invest. That potentially increases demand for assets. But here is where most go wrong: the real benefits for an average person are modest, just a few hundred euros, so don’t expect this to transform your investment capacity.

In terms of strategy during inflation and high interest rates, diversification is key. Gold has historically maintained value when everything depreciates, although it can be very volatile in the short term. Stocks suffer when rates rise (we saw that in 2022 with tech stocks hammered), but some sectors like energy benefit. Forex is attractive but risky. Government bonds offer safety but with inflation-adjusted yields that can be low.

The important thing is that you understand the deflated concept not only for taxes but to truly assess how your wealth is growing. If your investment rises 10% but inflation was 8%, your real deflated gain is only 2%. That changes everything in your risk-return analysis. It’s not glamorous, but it’s the reality of money.