I’ve been thinking about an economic concept that many investors overlook: understanding what a deflator means and how it truly affects our financial decisions. It’s not just fiscal theory—it directly impacts our purchasing power and how we can profit from our investments.

Look, the meaning of a deflator is quite straightforward at its core. It’s a tool that economists use to compare economic data over time by removing the “noise” of inflation. When inflation distorts the numbers, the deflator is what lets us see the reality: whether an economy really grew or if it only seems to because of rising prices. For example, if a country’s GDP went from 10 million to 12 million euros over two years, we might think it grew 20%. But if prices rose 10% during that period, the real growth was only 10%. That adjustment is what the deflator does.

This is important because it affects how we interpret the performance of our investments. A nominal return of 8% sounds good, but if inflation was 6%, the real return is barely 2%. The difference is huge for our finances.

Now, in the context of personal taxes, there’s a specific application that has generated quite a bit of debate, especially in countries like Spain. It’s about adjusting the income tax brackets (IRPF) in line with inflation. The idea is that if your salary only increases because prices went up (inflation), you shouldn’t end up paying more taxes. In the U.S., France, and Nordic countries, this adjustment is made annually. Germany does it every two years. Spain hasn’t done it at the national level since 2008, though some regions are considering it.

Why this matters for us as investors: if implemented correctly, it means people retain more purchasing power, which potentially increases demand for investments. More available money, more opportunities to invest.

When it comes to strategies in high-inflation and high-interest-rate environments (like we saw in 2022–2023), there are several interesting options. Gold has historically been a safe haven: when a currency loses value, gold tends to hold its value or increase it. Commodities in general may benefit as well, because their prices tend to rise with inflation.

Stocks are more complicated. Inflation and high rates generally compress valuations. But here’s the interesting part: within the market, there are winners and losers. In 2022, we saw energy companies surge while tech sank. That means if you identify resilient sectors, you can find opportunities.

Forex also plays a role. When inflation is high, the local currency typically depreciates, which can create opportunities if you understand currency movements well. But be careful: it’s highly volatile and requires experience.

The key is diversification. Inflation doesn’t affect all assets equally, so a well-balanced portfolio with stocks, commodities, Treasury bonds, and possibly foreign currencies can navigate these scenarios better.

A final reflection: although deflating the IRPF sounds good in theory for individuals, the real economic benefits are modest (we’re talking about hundreds of euros for the average person). So don’t expect a single fiscal measure to transform your financial situation. What you can control is how you structure your investments, taking into account the impact of taxes on your real returns. That’s the real game.