A few years ago, everyone was talking about the same thing: runaway inflation, interest rates rising nonstop, and how it was eroding our purchasing power. Well, behind those political debates about taxes was an economic concept that many people didn’t fully understand: **inflation adjustment**.

Here’s how it works. When you compare your income from one year to the next, you can’t simply look at the nominal figures. Inflation plays a nasty trick on you. If your salary rose by 5% but inflation was 8%, you actually lost purchasing power. To avoid this kind of distortion, economists use something called a **deflator**—which is basically a tool for stripping out the effects of price changes from those figures, so you can see what actually happened to the real volume.

Let’s look at a practical example. Imagine a country produces 10 million in goods and services. The next year, the figure rises to 12 million. At first glance, that looks like 20% growth, right? But if prices increased by 10% over that period, the deflated value of real GDP isn’t 12 million—it’s 11 million. That’s the difference between nominal GDP and real GDP. The price deflator helps you see exactly how much the economy really grew, without the noise from inflation.

This isn’t just theory. In Spain, for example, the debate about adjusting **IRPF** (personal income tax) became intense when inflation reached 6.8% in 2022. The idea was simple: if your salary increases nominally but inflation eats it away, you shouldn’t pay more taxes on a raise that doesn’t actually make you richer. It’s an adjustment of the progressive tax brackets so that taxpayers don’t lose purchasing power just because of inflation.

What’s interesting is that in the **U.S.**, **France**, and the **Nordic countries**, they already do this annually. **Germany** does it every two years. But in Spain, at the national level, it hadn’t been done since 2008. Some autonomous communities have started adopting it, but the central government took a while to move.

Now, how does all of this affect your investments? This is where it gets interesting. If the deflated value of your purchasing power is preserved thanks to measures like this, you’d have more money available to invest—and that opens up opportunities.

During inflationary periods with high interest rates, certain assets tend to perform better than others. Gold has historically been the safe haven, because it holds its value when a currency depreciates. It isn’t tied to the economy of any one country, so when everything starts to wobble, gold usually holds up. That said, in the short term it can be very volatile.

Stocks are more complicated. Inflation and high rates generally put pressure on the stock market because they make borrowing more expensive for companies and reduce investors’ purchasing power. But not all companies suffer equally. Companies that produce essential goods or energy can come out ahead, while the tech sector struggles. We saw that in 2022: energy firms at record highs, and tech in free fall.

Forex is another option, although it carries high risk. When inflation is high, currencies tend to depreciate. That can create opportunities if you know what you’re doing, but the foreign exchange market is volatile, and leverage can ruin you quickly.

Diversification is still key. If you adjust your taxes and recover some purchasing power, don’t put everything into a single asset. Mix stocks, commodities, government bonds, and diversify geographically. Since inflation affects different assets in different ways, a well-built portfolio helps protect you.

One thing many people underestimate: the real benefits of adjusting the **IRPF** for the average person aren’t that big. We’re talking about savings of a few hundred euros per year. So although it’s a positive measure for maintaining the adjusted (deflated) value of your income, it’s not the cure-all that some politicians presented. But every euro counts when inflation is eating away at your money.

What’s important is to understand that behind all these economic terms is a reality: your purchasing power. And if you understand how inflation adjustment works—how to calculate the adjusted value of your income and assets, and how that impacts your investment decisions—you’ll be better positioned to protect your money in turbulent times.