Indexation

Definition of 'Indexation'

A system where wages, prices and interest paid on securities is not fixed, but are adjusted in proportion to a relevant index, eg. the retail price index.

The advantage of indexation is that they protect the holder against large unforeseen changes in the value of money. The presence of a large number of index-linked arrangements in an economy makes inflation more difficult to stop, as it removes the effects of price increases.