2022: With high inflation, how should you adjust your investment strategy?

2022 is destined to be an extraordinary year. Central banks in Europe and the US have historically raised interest rates sharply, driven by record-breaking inflation pressures. In November, Spain’s inflation rate reached as high as 6.8%, meaning the money in your pocket is depreciating every month. In this economic environment, many governments are considering a policy tool: deflactar (adjusting taxes to offset inflation).

So what exactly does deflactar mean? Why is it so important for investors? Let’s start with the basics of economics.

What is Deflactar? Why Should You Care?

Simply put, deflactar is using an adjustment factor to eliminate the noise caused by price changes, revealing the true economic growth.

Imagine: a country produced €10 million worth of goods and services last year, and this year it increased to €12 million. At first glance, that’s a 20% growth, but if prices rose by 10% during the same period, the real growth is only 10%. This is the difference between real growth and nominal growth.

Economists use deflactar to handle this issue. They select a base year and use it to measure the true performance of other years. The resulting data is called “deflactado” (adjusted).

Why should investors care? Because it affects how you view asset performance. An investment that seems profitable on paper might actually be losing value when inflation isn’t considered.

Deflactar and IRPF: What Will Happen to Your Tax Bill?

In Spain, many politicians are discussing a policy: deflactar the Personal Income Tax (IRPF).

IRPF is one of Spain’s main taxes, with a progressive rate. The problem is: when you get a raise, if you don’t adjust the tax brackets, you might fall into a higher tax band, ultimately paying more taxes and losing purchasing power.

The core idea of deflactar IRPF is to adjust the tax brackets according to the inflation rate, ensuring that employees who get a raise don’t become poorer in real terms due to inflation.

Compare global practices:

• The US adjusts this annually
• France and Nordic countries also do yearly adjustments
• Germany adjusts every two years
• Spain hasn’t made nationwide adjustments since 2008

This is why, by the end of 2022, many Spanish autonomous communities announced plans to implement this measure.

Pros and Cons of This Policy

Supporters say: It protects the real income of wage earners and helps families maintain their standard of living during price surges.

Opponents argue: It mainly benefits high-income groups (since IRPF is progressive), and could reduce government tax revenue, impacting public services. Additionally, some believe maintaining people’s purchasing power might actually push prices higher, worsening inflation.

How to Invest in an Inflationary Era?

Since deflactar could give investors more disposable income, how should one invest during this special period?

1. Aggressive options: commodities and stocks

Gold: During inflation, gold is a classic safe-haven asset. Because gold doesn’t depend on any country’s economy, it often preserves or even increases in value when currencies depreciate. Although short-term volatility exists, long-term, gold is a powerful inflation hedge.

Stocks: It depends. High inflation + high interest rates usually hurt the stock market—rising borrowing costs for companies, lower profits, and downward pressure on stock prices. 2022 was an example. But this also means stocks are on sale. For investors with spare cash and a long-term outlook, buying quality companies at low prices could be an opportunity.

Another point: different industries are affected differently by inflation. Energy companies thrived in 2022, while tech stocks plummeted.

2. Conservative options: bonds and money markets

Government bonds and bonds, though offering lower yields, are safe. Backed by the government, designed to resist inflation risks. In a high-interest environment, these instruments become more attractive.

3. Diversification is key

Inflation impacts different assets in very different ways. A balanced portfolio (stocks + bonds + commodities + real estate) can help you stay steady amid market volatility.

4. Don’t forget tax implications

This is crucial: investment income is taxed. If the deflactar policy is implemented, your tax burden might decrease, resulting in higher net returns. In such cases, investments that seemed average before might become more attractive.

Final Words

If IRPF deflactar really materializes, the benefits for the average middle class are actually limited—saving only a few hundred euros per person. So don’t expect it to fundamentally change the investment landscape.

But from a broader perspective, it reflects the current economic reality: inflation is indeed eroding people’s real income, and governments are seeking solutions. As an investor, what you need to do is:

1. Understand the real impact of inflation — nominal returns look impressive, but after inflation and taxes, what you actually earn is different
2. Choose inflation-resistant assets — gold, stocks, real estate, etc., depending on your risk tolerance
3. Diversify your risk — don’t put all your eggs in one basket
4. Keep an eye on policy changes — policies like deflactar may have limited impact individually, but cumulatively can improve your real returns

What will 2023 bring? Nobody knows. But one thing is clear: in the game of inflation, sitting idly is the biggest loss.