Indexation is an economic practice used by both governments and businesses to adjust economic values or conditions according to the changes in another. It is primarily used in times of inflation to control the effects of inflation on wages, prices, taxes, benefits, pensions, and other indices whose values are linked to prices. Indexation ensures that the value of these items remains the same relative to other items whose values are affected by inflation.

Indexation can be used to adjust the value of wages, price inflation, taxes, pensions, benefits, and other values. When there is a high rate of inflation, wages may not keep up with the rate of inflation, leading to fewer purchasing power and real wage cuts for workers. Indexation provides a way to ensure that wages are adjusted both with inflation and changes in cost of living. This keeps the relative cost of living between two different areas at the same level, while still allowing changes to wages based on the rate of inflation in each region.

Taxation is another area where indexation is used. Governments often adjust the value of taxes to keep the purchasing power of their citizens consistent. This type of indexation ensures that the citizens are paying their fair share of taxes, and therefore aren’t facing dues that aren’t in line with the rate of inflation in the region.

The pension system is also likely to benefit from an indexation. This type of adjustment is done to ensure that the pension’s holders maintain the same purchasing power over time, since the rate of inflation could potentially erode the value of their pension over the years. Indexation helps to protect the pension funds by adjusting their value to match the rate of inflation in the region.

Overall, indexation can be used as a tool to protect businesses and individuals from the effects of inflation. It ensures that wages, taxes, pensions, and other indices remain stable over time, so that their values remain consistent. This type of adjustment is especially important in inflationary economies, where it helps to ensure that workers and other economically vulnerable populations are not deprived of their wages due to the effects of inflation.