A few years ago, 2022 was a major economic turning point. I remember there was a lot of talk about how expansionary fiscal policies came to an end and an unprecedented rise in interest rates began in Europe and the United States. Inflation surged to levels not seen in decades, and we all noticed how it ate away at our purchasing power with every purchase.

At the time, a term started to be heard a lot that many people didn’t fully understand: deflation adjustment—what it is and why it mattered. Basically, governments were trying to curb inflation with restrictive policies, raising interest rates and cutting spending. But here’s the interesting part: they were also trying to protect taxpayers’ purchasing power by adjusting taxes.

Deflation adjustment, in simple terms, is an adjustment economists make to compare real economic values without inflation or deflation distorting the comparison. It’s like saying: okay, GDP grew by 20%, but wait—prices also rose by 10%, so real growth was lower. A base year is used as a reference, and everything is calculated from there.

In Spain, the debate focused on adjusting the Personal Income Tax (IRPF), which means adjusting tax brackets so that people don’t lose purchasing power when they receive salary increases. If your salary goes up by 5% but inflation was also 5%, technically you didn’t get better off. Without that adjustment, you would end up in a higher tax bracket, paying more taxes on a salary that didn’t actually make you richer. Other countries like the United States, France, and the Nordic countries were already doing it annually. Germany did it every two years. But Spain at the national level hadn’t done it since 2008, although some autonomous communities began implementing it.

Those who supported this measure argued that it protected families from losing purchasing capacity. Critics said it benefited the wealthy more because of the tax’s progressivity, and that it could also increase demand and push prices even higher—the opposite of what was intended to combat inflation.

Now, thinking about investments during those turbulent times: if the IRPF had been adjusted for deflation, people would have had more money available to invest. Many considered gold a safe haven because it holds its value when the currency depreciates. Stocks were complicated because high inflation and high interest rates make business financing more expensive. But here’s the curious part: while sectors like energy were setting profit records, technology was sinking.

The currency market also offered opportunities because exchange rates moved with inflation, but it was high risk. The key was diversification: mixing stocks, bonds, commodities, real estate—everything depending on your risk profile.

The reality is that for the average person, the benefits of adjusting the IRPF for deflation were modest—just a few hundred euros. So thinking it would revolutionize investment levels was fairly optimistic. But conceptually, understanding what deflation adjustment is and how it works helps you interpret real economic figures better versus nominal ones—something fundamental if you’re making serious financial decisions.