How to Protect Your Investment Portfolio: Understanding Inflation Adjustment and Its Strategies

The Reality of 2022: When Inflation Redefined the Economic Game

The year 2022 marked a turning point in recent economic history. With unprecedented inflation in decades and interest rate hikes unmatched in Europe and the United States, governments were forced to implement restrictive fiscal policies to contain the erosion of purchasing power. In Spain, inflation reached 6.8% by November 2022, directly impacting the wallets of millions of consumers. This context sparked debates on how to truly protect citizens from the loss of buying capacity.

What is the Deflator and Why Should It Matter to You as an Investor?

When comparing economic data from different periods, we face a fundamental challenge: price changes distort reality. A deflator is the tool used by economists and investors to “clean” this distortion, allowing us to see real growth beyond inflation or deflation.

To understand it better, consider a practical example: if a country produces goods worth 10 million euros in year one, and this figure increases to 12 million in year two, one might mistakenly think there is a 20% growth. However, if prices increased by 10% during that period, the real growth was only 10%. When we apply this adjustment, we get the real GDP (11 million) instead of the nominal GDP (12 million).

This concept is crucial for investors because it allows them to truly assess whether their investments generate real returns or just nominal gains eroded by inflation.

Deflating Income Tax (IRPF): The Fiscal Measure That Redefines Your Saving Capacity

In the Spanish context, deflating (Impuesto sobre la Renta de las Personas Físicas) (Income Tax) refers to adjusting progressive tax brackets so that taxpayers do not lose purchasing power when receiving salary increases. Although it sounds technical, it has direct implications for your investment budget.

Suppose you receive a salary increase that, in real terms, does not reflect any improvement due to inflation. Without deflating the IRPF, this increase would push you into a higher tax bracket, resulting in higher taxation. With deflation, the brackets are adjusted according to the CPI, protecting your disposable income for investments.

In the United States, France, and Nordic countries, this adjustment has been made annually for years. Germany does it biennially. Spain, on the other hand, has not implemented it at the national level since 2008, although several autonomous communities have announced their adoption for upcoming fiscal years.

Impact on Your Investment Decisions: More Liquidity, More Opportunities

If the deflation of the IRPF were implemented, investors would have more after-tax income, which could catalyze greater capital allocation toward investments. This effect would be especially notable in income-generating assets such as stocks or real estate, where net returns would improve significantly.

However, critics point out that this measure disproportionately benefits high incomes due to the progressive nature of the IRPF, while potentially exacerbating inflation by increasing demand without reducing price pressure. Additionally, the reduction in fiscal revenues could compromise funding for essential public services.

Investment Strategies in Inflationary and Fiscal Restriction Contexts

Commodities: The Traditional Safe Haven

Gold has historically maintained its value during inflationary periods as it is not linked to specific national currencies. When interest rates rise, many investors consider it an attractive alternative to bonds that generate lower net yields after paying IRPF. In the long term, it has shown appreciation, although in short- and medium-term horizons, it exhibits considerable volatility.

Stocks: Smart Selection in Challenging Markets

Inflation and high interest rates generally exert negative pressure on stock markets by reducing corporate purchasing power and increasing financing costs. 2022 clearly demonstrated this pattern. However, companies in resilient demand sectors like energy achieved record profits, while technology faced severe declines.

For investors with a long-term horizon and available liquidity, recessions present opportunities: they allow accumulating securities at depressed prices before documented historic recoveries.

Currencies: Calculated Volatility

The forex market reacts sensitively to inflationary and interest rate changes. High inflation typically depreciates the national currency, creating opportunities to appreciate foreign currencies. However, this market is extremely volatile and exposes traders to leverage, making participation risky for inexperienced investors.

The Critical Role of Diversification

Inflation and restrictive policies affect different assets in dissimilar ways. Building balanced portfolios including stocks, commodities, government-backed bonds, and currencies allows effective navigation of different economic regimes while mitigating concentrated risk.

Consider that while deflating the IRPF could free hundreds of euros annually for the average person, its macroeconomic impact on overall national investment levels would likely be moderate. True protection lies in an intelligently diversified strategy tailored to your risk profile and time horizon.