I've been observing for a while how people talk about deflation without really understanding what it actually means. And look, if you invest or simply make money in Spain, this affects you more than you think.

Let's start with the basics. Deflated meaning: it’s adjusting economic numbers by removing the effect of inflation to see what really happened. Imagine your salary increased by 10% this year, sounds good, right? But if inflation was 8%, your actual purchasing power only grew by 2%. That’s what the deflated concept tries to capture. Without this adjustment, you’d be comparing apples to oranges.

In Spain, the debate about deflating the IRPF (Personal Income Tax) intensified a few years ago when inflation skyrocketed. The idea is simple: if your income rises but inflation also does, you shouldn’t be taxed as if your situation has truly improved. The Spanish tax system has progressive brackets, so if you move up a bracket due to nominal inflation, you pay more taxes without gaining real purchasing power. That’s what this measure aims to correct.

The interesting thing is that other countries already do it. In the United States, France, and Nordic countries, they deflate annually. Germany every two years. But Spain at the national level hasn’t done it since 2008, although some autonomous communities have started implementing it. The deflated effect on an average taxpayer’s pocket isn’t spectacular (we’re talking hundreds of euros), but for investors, every euro counts.

Now, how does this impact your investment strategy? If you deflate the IRPF, you have more liquidity available. That can change where you put your money. Some investors take advantage to enter assets that historically perform well during inflation: energy company stocks, gold, real estate. Others prefer bonds and Treasury securities that adjust yields to inflation.

What we learned in 2022 was brutal: high inflation and interest rates are enemies of the traditional stock market. But paradoxically, it’s when there are more opportunities if you have patience. Recessions lower stock prices, and the market historically recovers. Gold retains value when everything collapses. Forex becomes volatile but potentially profitable if you know what you’re doing.

Diversification remains key. Don’t put everything into one asset thinking inflation will save it. Mix stocks, commodities, bonds, maybe some currencies. Each behaves differently depending on the economic scenario.

What you must not forget: understanding what deflated meaning is helps you see your true return on investment. If you earn 8% on an asset but inflation was 6%, you actually gained 2%. And that’s what matters for your real purchasing power. Mentally deflate your investments, adjust for taxes, and only then will you see if you’re truly winning or just maintaining what you have.