Indexation

Indexation is an economic process by which income, unemployment benefits, and wages are raised to ease out the effects of inflation. This is done to keep the purchasing power of consumers constant in spite of a rise in the price level. Alternatively, indexation also refers to the inflating cost of an asset by an ‘inflation factor’ notified by government authorities. This inflation factor is termed cost inflation index, which allows keeping asset value at par with existing market prices. Inflationary conditions tend to gradually increase this cost inflation index every year.

Cost inflation index (CII) is calculated as,

CII = Inflation index for year in which asset is sold/ Inflation index for year in which asset was bought

Fundamental Indexation

Fundamental indexation is often used in constructing indexes for stock market operations. Fundamental factors determining the indexation process depends on:

• weighing of stocks on the basis of fundamental factors,
• selecting stocks on the basis of these fundamental factors,
• both weighing and selecting stocks on the basis of fundamental factors

Wage Indexation

Adjustment of wages allowing for inflation is termed as wage indexation. Wage indexation can either be full which allows for total compensation of wages commensurate with inflation rate; or, partial. In partial wage indexation, lower wages are totally indexed, while higher wage earners receive a fixed monetary compensation. This phenomenon is also termed plateau indexation.

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