Editing Indexation (section)

==Overview==
From a [[macroeconomics]] standpoint there are four main categories of indexation:

# wage indexation,<ref>{{Cite journal|last1=Drudi|first1=Francesco|last2=Giordano|first2=Raffaela|date=2000|title=Wage Indexation, Employment and Inflation|url=https://www.jstor.org/stable/3440813|journal=The Scandinavian Journal of Economics|volume=102|issue=4|pages=645–668|doi=10.1111/1467-9442.00219 |jstor=3440813 |issn=0347-0520|url-access=subscription}}</ref>
# [[financial instrument]]s rate indexation,<ref>{{Cite journal|last=James|first=Christopher|date=1982|title=An Analysis of Bank Loan Rate Indexation|url=https://www.jstor.org/stable/2327710|journal=The Journal of Finance|volume=37|issue=3|pages=809–825|doi=10.2307/2327710|jstor=2327710 |issn=0022-1082|url-access=subscription}}</ref>
# [[tax rate]] indexation,<ref>{{Cite journal|last=SUNLEY|first=EMIL M.|title=Indexing the Income Tax for Inflation |date=1979|url=https://www.jstor.org/stable/41862249|journal=National Tax Journal|volume=32|issue=3|pages=328–333|doi=10.1086/NTJ41862249 |jstor=41862249 |s2cid=232212537 |issn=0028-0283|url-access=subscription}}</ref> and
# [[exchange rate]] indexation.<ref>{{Cite journal|last=Kiguel|first=Miguel A.|date=1994|title=EXCHANGE RATE POLICY, THE REAL EXCHANGE RATE, AND INFLATION: Lessons from Latin America|url=https://www.jstor.org/stable/41951260|journal=Cuadernos de Economía|volume=31|issue=93|pages=229–249|jstor=41951260 |issn=0716-0046}}</ref>

The first three are indexed to [[inflation]].  The last one is typically indexed to a [[foreign currency]], mainly the [[US dollar]].  Any of these different types of indexation can be reversed (deindexation).

Applying a cost-of-living escalation [[Cost-of-living index|COLA]] clause to a stream of periodic payments protects the real value of those payments and effectively transfers the risk of inflation from the payee to the payor, who must pay more each year to reflect the increases in prices.  Thus, inflation indexation is often applied to pension payments, rents and other situations which are not subject to regular re-pricing in the market.

COLA is not [[Consumer price index|CPI]], which is an aggregate indicator.  Using CPI as a COLA salary adjustment for taxable income fails to recognize that increases are generally taxed at the highest marginal tax rate whereas an individual's rising costs are paid with after-tax dollars - dollars commensurate with an individual's average after-tax level.  Indexing [[tax bracket]]s does not address this fundamental issue but it does effectively eliminate "bracket-creep".
 
Indexation has been very important in high-inflation environments, and was known as monetary correction "{{lang|pt-BR|correção monetária}}" in Brazil from 1964 to 1994. Some countries have cut back significantly in the use of indexation and cost-of-living escalation clauses, first by applying only partial protection for price increases and eventually eliminating such protection altogether when inflation is brought down to single digits.

Protecting one of the parties from the risk of inflation means that the price risk must be shifted to another party. For example, if state pensions are adjusted for inflation, the price risk is passed from the pensioners to the taxpayers.