A while ago, I wondered why some governments obsess over adjusting tax brackets when there is inflation. The answer lies in understanding what the deflator is and how it works, something that affects our wallets more than we think.

Basically, deflating is an economic concept that allows us to compare real values by removing the noise of price changes. Imagine your salary increased by 5% this year, but inflation also grew by 5%. Did you really gain anything? No. That’s why economists use deflators: they are figures that adjust nominal numbers to show the real change in volume, not just in prices.

In 2022, when inflation in Spain hovered around 6.8%, many politicians debated deflating the Personal Income Tax (IRPF). The idea was simple: if wages rise due to inflation but taxes are calculated on those higher nominal figures, taxpayers end up paying more without truly gaining more purchasing power. It’s like an unintentional fiscal trap.

The deflation of the IRPF refers to adjusting the tax brackets so that someone receiving a nominal increase doesn’t end up in a higher tax category solely because of inflation. France, the United States, and Nordic countries do this annually. Germany every two years. Spain, on the other hand, hadn’t done it at the national level since 2008, although some autonomous communities began implementing it.

Now, what does this mean for investors? If the IRPF is deflated, taxpayers retain more disposable income, which could theoretically increase demand for investments. But here’s the interesting part: inflation and high interest rates impact different asset types differently.

Gold, for example, has historically been a safe haven in times of uncertainty. When money loses value, gold tends to hold or increase its value because it’s not tied to any specific economy. That said, in the short term, it can be very volatile. In the long run, it generally gains.

Stocks are more complicated. Inflation and high rates usually pressure markets because they reduce purchasing power and make business financing more expensive. That’s what we saw in 2022: tech stocks plummeted while energy stocks hit record highs. But here’s the paradox: during recessions, if you have liquidity, you can buy cheap stocks knowing that historically, the market recovers in the long term.

Forex is another animal. High inflation generally depreciates the local currency, which can make buying foreign currencies attractive. But it’s volatile and risky, especially with leverage.

What many don’t mention is that the real benefits of deflating the IRPF for the average person are modest, just a few hundred euros annually. So, although the measure is conceptually important, its impact on national investment levels is limited.

The real lesson here is that understanding what the deflator is helps you interpret economic numbers better. It’s not just about taxes; it’s about recognizing when you’re truly gaining or just seeing numbers rise on paper. When you invest, always think in real terms, adjusted for inflation. That’s what separates those who make informed decisions from those who just follow trends.