Deflactar IRPF: The key to protecting your purchasing power against inflation

The economic scenario of 2022 highlighted a phenomenon that hadn’t been seen in decades: unprecedented inflation in Europe and the United States, accompanied by sharp increases in interest rates. In Spain, inflation reached 6.8% in November of that year, directly affecting the wallets of millions of citizens. Faced with this reality, the question many investors ask is: what is deflating and how can it impact my financial decisions?

Understanding what deflating is to protect your investments

When prices rise broadly, not only do your expenses increase, but your ability to assess the true growth of your assets and wealth becomes distorted. This is where the concept of deflating comes into play.

A deflator is an economic tool that adjusts nominal values to eliminate the effect of price changes, allowing for accurate comparisons over time. Imagine your company billed 10 million euros last year, and this year 12 million. Without considering inflation, it would seem like a 20% growth. However, if prices increased by 10%, the real growth was only 10%. This adjustment is what is known as deflating.

When we normalize data considering inflation, we obtain what economists call real GDP, in contrast to nominal GDP which has not been adjusted. This calculation is essential to understand whether your capital is truly growing or simply reflecting market price variations.

Deflating the IRPF: A fiscal measure to maintain your purchasing power

Beyond economic analysis, there is a specific fiscal measure that has gained relevance: deflating the (Personal Income Tax). This fiscal policy aims to adjust tax brackets to the level of inflation, ensuring that workers do not lose purchasing power simply because their nominal wages increased.

What happens without deflating the IRPF?

In an inflationary scenario, wages tend to increase to maintain purchasing power. However, if the IRPF brackets are not adjusted, taxpayers end up paying more taxes on a gain that, in real terms, only compensates for inflation. This is known as “fiscal friction.”

Reducing the amount of income tax through the adjustment of tax brackets, increasing deductions, or tax credits is precisely what deflating the IRPF means. It is a measure that prevents inflation from indirectly reducing your purchasing power through a higher tax burden.

International practice

Countries like the United States, France, and Nordic nations make this adjustment annually. Germany does it every two years. However, in Spain, this adjustment has not been systematically implemented nationwide since 2008, although several autonomous communities have begun adopting this measure independently.

The impact of this omission is significant: Spanish taxpayers gradually lose purchasing power due to the “incomplete indexing” of their tax obligations.

Advantages and criticisms of this fiscal policy

In favor of deflating the IRPF

Proponents argue that it is the most direct way to protect families in high-price environments. It allows available income to be maintained in real terms, making it easier for families to cover their expenses without losing economic well-being.

Criticisms

Detractors point out that it creates inequality, as the greater fiscal benefits fall on higher incomes due to the system’s progressivity. Additionally, they argue that recovering purchasing power could increase demand and, with it, pressure prices upward again, counteracting inflation control efforts.

Another major criticism is that it reduces government revenue, potentially compromising funding for essential public services such as education and healthcare. The actual economic benefits for an average person are modest, amounting to just a few hundred euros annually.

Investment strategies in the face of inflation and restrictive policies

When inflation is high and restrictive fiscal policies coexist, different financial assets respond in various ways. If deflating the IRPF were implemented, investors would have higher income, potentially increasing demand for investments.

Strategic options for investors

Commodities and gold: Gold has historically served as a safe haven during economic crises. When money loses value, this metal tends to preserve or increase its value, without being tied to specific economies. In the long term, it has proven to be a protector of purchasing power, although in the short and medium term, it can be very volatile.

Stocks: High inflation and elevated interest rates generally pressure stock prices, reducing corporate margins and increasing financing costs. However, some companies are more resilient. During 2022, energy sector companies recorded record profits, while tech companies suffered significant declines. For long-term investors with available liquidity, recessions can present opportunities to buy at depressed prices.

Forex market (Forex): Exchange rates are directly affected by variations in inflation and interest rates. High inflation typically depreciates the national currency, making foreign currencies attractive to buy. However, forex is a high-risk, highly volatile market, especially for inexperienced investors, and is subject to leverage that multiplies both gains and losses.

Low-risk assets: Bonds and Treasury securities offer inflation-adjusted returns, backed by issuing governments, although typically with modest yields.

Diversification: The portfolio should include a mix of assets that perform differently depending on market conditions, reducing concentrated risk.

The tax factor in your returns

A critical aspect often overlooked: investment returns are taxed in the IRPF. Therefore, considering the impact of taxes on final purchasing capacity is essential. If deflating the IRPF increased your available income, you would have additional capital to invest, especially in income-generating assets like stocks or real estate.

Conclusion: Deflating as a strategic tool

Deflating the IRPF and understanding the concept of a deflator are central elements for smart navigation in inflationary economies. Adjusting fiscal policies to the reality of rising prices can free up income that, redirected toward strategic investments, potentially generate real wealth growth.

However, it is crucial to remember that no investment is risk-free and that values fluctuate. The true power of deflating lies in maintaining your real purchasing power while evaluating investment options with a long-term perspective and proper diversification, thus protecting your wealth from inflation erosion.