A few years ago, when inflation skyrocketed and central banks started raising interest rates nonstop, many of us wondered what we could do to protect our money. I remember reading about restrictive fiscal policies, rising CPI that kept growing, and a concept that was constantly repeated in political debates: deflating the IRPF.

Basically, deflating is an economic term used to adjust numbers by removing the effect of inflation. When you see that GDP grew by 12% but prices increased by 10%, the real growth was only 2%. Without that adjustment, you’d be comparing apples to oranges. Economists use it all the time to measure whether we are truly better or worse off than a year ago.

Now, when we talk about deflating the IRPF specifically, we mean adjusting the tax brackets according to inflation and the CPI. The idea is that if your salary only increases because prices went up, you shouldn’t pay more taxes. Sounds logical, right? In 2022, when inflation in Spain hovered around 6.8%, this debate was everywhere. France, the United States, and Nordic countries already do it annually. Germany every two years. But Spain hasn’t done it at the national level since 2008, although some autonomous communities have started to consider it.

What’s interesting is that this measure has two sides. On one hand, it helps people maintain their purchasing power during times of high prices. But critics point out that it benefits those who earn more money because IRPF is progressive. And also, if people have more disposable income, they might spend more and push prices even higher.

From an investor’s perspective, all this matters quite a bit. If IRPF is deflated, people would have more disposable income to invest. That could increase demand for stocks, real estate, commodities. In times of high inflation and elevated CPI, many seek to protect their capital in gold, which historically retains its value when everything else depreciates. Others bet on companies that sell essential goods because people keep buying regardless of the economic situation.

With high interest rates, the stock market suffers because companies pay more to borrow. But paradoxically, these price drops can be opportunities if you have liquidity and patience. The stock market recovers in the long run, even after brutal declines.

Diversification is key in such scenarios. You can’t bet everything on one asset. Mix stocks, government bonds, commodities, maybe some forex if you know what you’re doing. The currency market can be interesting when there’s inflation because exchange rates move with price levels, but it’s highly volatile and requires experience.

What I learned is that understanding how to deflate numbers and how CPI truly affects your purchasing power is essential for smart investing. It’s not just about choosing what to buy, but also about understanding what’s happening behind the numbers. Because if inflation rises but your salary also increases, and IRPF is deflated, your situation improves. But if only inflation goes up, you lose. The difference between ignoring this and understanding it can be hundreds of euros a year, or thousands if you invest wisely.