what is indexation 
indexation is a system or technique used by organizations or governments to connect prices and asset values it s accomplished by linking adjustments made to the value of a good the price of a service or another specified value to a predetermined price or composite index indexation requires identifying a price index and determining whether linking the value to the price index will accomplish the organization s goals it s most commonly used with wages in a high inflation environment indexation is also known as escalating understanding indexationindexing a given price or payment to other prices can serve two main purposes it s a pre specified process all parties involved are typically aware of how the link works indexation can be used to maintain a stable relative price between two or more goods or services this is done by specifying the desired target ratio of two prices and adjusting one price when the other changes to maintain the ratio an ice cream stand might index the sale price of ice cream cones to the wholesale price they pay for ice cream this maintains a steady profit margin by keeping the price of the cones constant relative to the cost of bulk ice cream the output price and the business remain profitable if the wholesale price of the input doubles indexation can also maintain a stable real price of a good or service relative to the purchasing power of a currency unit a price or asset value is linked to the price level of a basket of goods which is usually set equal to 100 price indexes are commonly published by official government agencies often for the specific purpose of convenient use in the indexation of prices wages and transfer payments businesses may use this type of indexation to match an employee s salary increases to the inflation rate an increase in the consumer price level over time will lead to an increase in salary this particular type of indexation is called a cost of living increase cola 