How does the deflated value adjustment impact your investment decisions

The 2022 year-end marked a turning point in the global economy: the end of massive fiscal stimulus policies and historic interest rate hikes in Europe and the United States, all in response to unprecedented inflation in decades. This rise in prices has directly impacted consumers’ purchasing power, regardless of their economic situation, resulting in a real loss in buying capacity.

Faced with this scenario, governments and central banks implemented restrictive fiscal measures: increases in interest rates that make credit more expensive for families and businesses, reduction of public spending, and tax adjustments. One of these measures is precisely the adjustment of the IRPF, which aims to maintain taxpayers’ purchasing power through normalization of tax brackets.

Understanding what is deflated value in economics

To compare the actual economic performance of a country, company, or individual over time, it is necessary to eliminate the “noise” generated by price changes. This is the main purpose of the concept of deflated value.

A deflator is simply an index that reflects how prices vary over a period. It is used to “clean” economic data, removing the effect of inflation or deflation to reveal real volume growth.

Practical example: A country generates 10 million in goods and services in year 1. In year 2, the figure rises to 12 million. Looking only at the numbers, it seems like a 20% growth. But if prices increased by 10% between both years, the deflated value shows that the real growth was 10%. This adjusted figure is called real GDP, while the 12 million are nominal GDP.

Adjusting values using deflators is essential to compare authentic economic variables: gross domestic product, business sales, or workers’ real wages.

What does deflating IRPF mean?

In Spain, the fiscal debate revolves around a specific measure: deflating IRPF (Personal Income Tax). It refers to adjusting the progressive tax brackets of the tax so that, when nominal wages rise with inflation, taxpayers do not pay more taxes simply because they earn more money nominally.

The IRPF in the inflationary context

IRPF is a progressive and direct tax that taxes the income of Spanish residents. When there is high inflation (in November 2022 it reached 6.8% in Spain), nominal wages tend to increase, but this can push taxpayers into higher tax brackets, increasing their actual tax burden without improving their purchasing power.

Deflating IRPF means adapting these brackets to the consumer price index (CPI) or to the real increase in remuneration. With this measure, a worker receiving a nominal salary increase equivalent to inflation will not see their tax burden increase.

International context: The United States performs this adjustment annually, as do France and Nordic countries. Germany does it every two years. In Spain, this adjustment has not been implemented nationally since 2008, although some autonomous communities have announced plans to adopt it.

Effects and controversy of this measure

Proponents argue that it is essential to protect families’ purchasing power during times of high prices. Critics counter that it mainly benefits higher incomes (due to the progressivity of the tax) and that increasing purchasing power could boost demand, fueling more inflation. They also fear it could reduce government revenues needed to fund public services.

Investment strategies amid inflation and restrictive policies

When IRPF is deflated, investors have more disposable income, broadening investment options. Strategies to consider include:

Defensive and inflationary assets

Gold: Historically, it acts as a refuge during economic uncertainty. When inflation rises and money loses value, gold tends to maintain or appreciate its value because it is not tied to any specific economy. Long-term, it is a good option, although in the short and medium term, it can be very volatile.

Bonds and Treasury securities: Low-risk assets backed by governments, designed to generate inflation-adjusted returns, though they generate tax gains in IRPF.

Commodities: Tend to benefit when overall prices rise, as their value increases with inflation.

Stock market

High inflation and elevated interest rates are generally negative for stocks: they reduce investors’ purchasing power and make corporate financing more expensive. This results in lower corporate profits and falling stock prices, as occurred in 2022.

However, not all sectors are affected equally. Energy companies posted record profits in 2022, while sectors like technology collapsed. Companies selling essential goods or services in times of crisis may withstand better.

Paradoxically, for long-term investors with available liquidity, a recession creates opportunities: buying stocks at depressed prices knowing that historically, markets recover and grow over the long term.

Currencies and Forex

The currency market is attractive during high inflation because exchange rates adjust to new interest rate dynamics. High inflation usually devalues the national currency, making it attractive to buy foreign currencies that appreciate relatively.

But warning: forex is extremely volatile and high risk, especially with leverage, where inexperienced investors can lose large sums with small initial investments.

Diversification

The key is to build portfolios combining assets that perform well in different scenarios: some resilient to inflation, others low risk, and some with potential for selective growth depending on sectors.

Real impact of deflating taxes on investment

If IRPF is deflated, the potential effects on investments would be:

• Increased demand for investments: With more after-tax income, especially in investments that generate returns (stocks, real estate).
• Sector reallocation: If the measure includes specific incentives (green energy, technology), more capital would flow into those sectors.
• Moderate effect: It is important to recognize that average tax savings are only a few hundred euros per year, so deflating IRPF is unlikely to be a decisive factor in significant changes in national investment.

Final considerations

Adjusting the deflated value in taxation contexts is a tool to maintain fiscal equity during inflation. Although technically beneficial to all, its real effects are more pronounced on higher incomes.

When investing, it is essential to consider how inflation, interest rates, and tax burden impact the real return of each asset. No investment is risk-free, and values fluctuate, but a well-diversified and scenario-adjusted portfolio can protect and grow wealth even in turbulent times.