What is 'Indexation'
Indexation is linking adjustments made to the value of a good, service or other metric, to a predetermined index. Indexation requires the identification of a price index and whether a linking the value to the price index, will accomplish the organization's goals. Indexation is most commonly used with wages in a high inflation environment.
BREAKING DOWN 'Indexation'
Businesses may use indexation to match an employee's salary to the inflation rate, meaning that an increase in the inflation rate over a period of time, will lead to an increase in salary. This particular type of indexation is called a cost of living increase (COLA). Indexation is a pre-specified process, meaning that all parties involved are typically aware of how the link works.