I recently started researching what IPC really is, because honestly everyone talks about it but nobody explains clearly how it works. It turns out that the Consumer Price Index is basically a monthly snapshot of how the prices of the things we normally buy go up or down. In Spain, the INE is the entity responsible for measuring it, analyzing a basket of 500 products and services to identify the trend.

Many people confuse the IPC with inflation, and I understand why. Inflation is the widespread increase in prices across the entire economy, while the IPC is more specific: it measures how the prices of the goods and services that people actually consume change. It’s like the difference between seeing the whole forest versus counting the trees that matter.

What’s interesting is that the IPC doesn’t just appear out of nowhere. Several factors affect it: when production costs, labor, or energy rise, everything becomes more expensive. If demand for goods increases, prices go up. Changes in the exchange rate also influence it, especially with imported products. And then there are monetary policies: when central banks raise interest rates, demand falls and prices drop. Supply shocks can be brutal as well—like what happened with the invasion of Ucrania and the energy crisis.

Now, why should I care about all this as an investor? A high IPC destabilizes international trade, makes exports less competitive, and creates economic uncertainty. That directly translates into volatility in stock markets. In fact, in 2022 the DAX fell 12.5% and the EUROSTOXX50 dropped 11.4%, setting records for losses. When inflation is high, investors demand higher returns and shift toward government bonds, making stocks less attractive.

In 2022 in Spain, the IPC reached a peak of 10.8% in July, driven by that energy crisis. Then it started to decline when the Banco Central Europeo began raising interest rates in summer and fall. By December, it closed at 5.7%. That was an important turning point.

If you want to protect your portfolio in scenarios like that, diversification is key. Investing in real assets such as real estate and commodities works as a hedge against inflation. Inflation-linked bonds are also interesting because their yields rise with prices. Short-term investments and government bonds offer stability. And don’t forget to look at international assets to reduce the impact locally.

A curious fact: in inflationary contexts, banks are usually the biggest beneficiaries because they lend at higher rates and their margins increase. But they also carry risk: if people can’t pay their debts, non-performing loans grow.

The main lesson is that understanding what IPC is and how it works helps you make more informed investment decisions. It’s not just a number that shows up in the news—it’s a compass for navigating the economy.