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Definition of INDEXATION
: a system of economic control in which certain variables (as wages and interest) are tied to a cost-of-living index so that both rise or fall at the same rate and the detrimental effect of inflation is theoretically eliminated
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.