## How Inflation Adjustment Fiscal Policies Impact Your Investment Portfolio

The inflation of 2022 marked a turning point in global economic policies, with historic interest rate hikes in Europe and the United States. In Spain, where inflation reached 6.8% in November of that year, governments implemented measures to protect citizens' purchasing power. One of the most debated was the adjustment of tax brackets according to inflation, a practice that has been in place for decades in countries like France and the United States. But what does this concept really mean, and how does it affect your investment strategy?

## The Meaning of Deflating: Beyond the Technical Term

When we talk about the meaning of deflating in economics, we refer to a fundamental process for comparing real financial data over time. That is, separating inflation noise from the true numbers.

Imagine a company reports sales of 10 million euros in 2021 and 12 million in 2022. At first glance, it seems like a 20% growth. However, if prices increased by 10% during that period, the real growth is only 10%. This adjustment of numbers to eliminate the effect of prices is what economists do with a deflator.

The deflator acts as a correcting lens. It compares a base period with subsequent periods and expresses the change in prices for a product, a group of products, or macro indicators like GDP. When a value has been adjusted this way, it is called deflated. It is the difference between nominal GDP (numbers without adjustment) and real GDP (numbers adjusted for inflation).

**Why does this matter to you as an investor?** Because if you do not understand the difference between nominal and real growth, your investment decisions will be based on numerical illusions, not realities.

## Tax Adjustment in Times of Inflation: Deflating the IRPF

In Spain, the tax system taxes personal income through the Personal Income Tax (IRPF), a direct and progressive tax. Progressivity means that the higher the income, the higher the percentage of tax paid.

Here arises the problem: when inflation rises and your salary increases nominally to maintain your purchasing power, you automatically move to a higher tax bracket. You pay more taxes on money that, in reality, has less value. This is what some call "tax drag."

The fiscal adjustment measure debated in Spain aims precisely at the opposite: to adapt the tax brackets according to inflation so that a salary increase that only compensates for the loss of value does not push you into a higher tax category. It is about protecting the taxpayer's purchasing power.

Countries like France, Germany, and Nordic nations already implement this adjustment annually (Germany every two years). The United States also does it regularly. In Spain, it has not been applied nationwide since 2008, although some autonomous communities have announced its adoption.

## Advantages and Tensions of This Policy

**Proponents** argue that it is fair: it prevents inflation from punishing workers twice, first by reducing the value of their money and then by increasing their tax burdens.

**Critics** point out two main objections. First: the biggest beneficiaries are high-income earners because, in a progressive system, they move between brackets more easily. Second: reducing taxes increases available spending, which can raise demand and push prices up again, creating an inflation cycle.

They also mention that a reduction in tax revenues could affect the funding of essential public services.

## How Inflation Contexts Affect Your Investment Strategy

If IRPF were adjusted, more available income would mean greater investment capacity. But regardless of that specific measure, what should you do when prices rise and central banks raise interest rates?

**Commodities like gold:** Historically, gold maintains its value or increases it when inflation is high and money depreciates. It is not tied to any specific economy, making it a safe haven in turbulent times. The downside: short- and medium-term volatility, although long-term it has grown consistently.

**Stocks:** Inflation and high rates pressure valuations. Financing costs rise for companies, reducing profits and pushing prices down. This happened in 2022, where tech stocks plummeted while energy stocks hit record highs. However, during recessions, liquidity-rich investors with a long horizon can take advantage of low prices to buy. Historically, markets recover.

**Currencies:** The forex market can offer opportunities in high inflation. When inflation is elevated, national currencies tend to depreciate, making foreign currencies attractive as they can appreciate in relative value. But this market is highly volatile and requires experience; leverage can multiply gains and losses.

**Treasury Bonds:** Low-risk assets backed by governments. Designed to provide inflation-adjusted returns, although in periods of high interest rates, older bonds lose market value.

## Practical Recommendations

**Diversify your portfolio.** Inflation affects different assets unequally. Combine stocks, commodities, currencies, and bonds according to your risk profile.

**Consider tax impact.** Remember that investment returns are taxed in the IRPF. Maximizing gross returns is incomplete; after-tax profitability matters.

**Focus on resilient companies.** Not all sectors suffer equally in inflation. Producers of essential goods or energy tend to withstand better.

**Have a long-term horizon.** Although 2022 was volatile, markets have historically grown. Investors who bought during recessions achieved positive returns years later.

## Final Reflection

Inflation-adjusted fiscal policies, while important for the average taxpayer's purchasing power, will not generate revolutionary changes in personal savings (ronda cientos de euros anuales). However, the dynamics of inflation, interest rates, and investment decisions do transform wealth.

Understanding the meaning of deflating and how inflation distorts our perceptions of real growth is crucial. Your investment strategy should be based on real numbers, resilient assets, and a plan tailored to your profile. Recessions are temporary; well-invested savings are permanent.