indexation

in·dex·a·tion

(ĭn'dĕk-sā'shən) pronunciation

n.
The automatic adjustment of an economic variable, such as wages, taxes, or pension benefits, to a cost-of-living index, so that the variable rises or falls in accordance with the rate of inflation.

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Comparison of price levels over time. In fiscal policy, indexation is used as a means of offsetting the effect of inflation or deflation on social security payments and taxes by measuring the real value of money from a fixed point of reference, usually a price index. Without indexing, recipients of social security benefits, for example, would suffer during times of inflation if their benefits remained at a fixed rate. Indexation is used in some countries to offset "bracket creep," which occurs in any progressive tax system when inflation pushes taxpayers into higher tax brackets. Indexation may also refer to the linking of wage rates and financial instruments to a price index.

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Barron's Accounting Dictionary:

indexation

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Feature of a contract or agreement designed to adjust its value for general price-level changes. An example is a cost - of - living adjustment (cola) in a labor contract.

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Indexation

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This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (April 2009)

Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation.

Applying a cost-of-living escalation COLA clause to a stream of periodic payments protects the real value of those payments and effectively transfers the risk of inflation from the payee to the payor, who must pay more each year to reflect the increases in prices. Thus, inflation indexation is often applied to pension payments, rents and other situations which are not subject to regular re-pricing in the market.

COLA is not CPI, which is an aggregate indicator. Using CPI as a COLA salary adjustment for taxable income fails to recognize that increases are generally taxed at the highest marginal tax rate whereas an individual's rising costs are paid with after-tax dollars - dollars commensurate with an individual's average after-tax level. Indexing tax brackets does not address this fundamental issue but it does effectively eliminate "bracket-creep".

Indexation has been very important in high-inflation environments, and was known as monetary correction "correção monetária" in Brazil from 1964 to 1994. Some countries have cut back significantly in the use of indexation and cost-of-living escalation clauses, first by applying only partial protection for price increases and eventually eliminating such protection altogether when inflation is brought down to single digits.

Protecting one of the parties from the risk of inflation means that the price risk must be shifted to another party. For example, if state pensions are adjusted for inflation, the price risk is passed from the pensioners to the taxpayers.

		American Heritage Dictionary. The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2007, 2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved. Read more
		Britannica Concise Encyclopedia. Britannica Concise Encyclopedia. © 1994-2012 Encyclopædia Britannica, Inc. All rights reserved. Read more
		Barron's Accounting Dictionary. Dictionary of Accounting Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved. Read more
		Wikipedia on Answers.com. This article is licensed under the Creative Commons Attribution/Share-Alike License. It uses material from the Wikipedia article Indexation. Read more

	Indexed Bond (in accounting)
	Tax Indexing (in accounting)
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indexation

in·dex·a·tion

indexation

indexation

Indexation

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