INDEXATION

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INDEXATION

As we have just seen, price indexes are used to correct for the effects of inflation when comparing dollar figures from different times. This type of correction shows up in many places in the economy When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation For example, many long-term contracts between firms and unions include partial or complete indexation of the wage to the consumer price index. Such a provision is called’ a cost-of-living allowance, or COLA. A COLA automatically raises the wage when the consumer price index rises Indexation is also a feature of many laws. Social Security benefits, for example, are adjusted every year to compensate the elderly fer increases in prices. The brackets of the federal income tax-the income levels at which the tax rates change-are also indexed for inflation. There are, however, many ways in which the tax system is not indexed for inflation, even when perhaps it should be. We discuss these issues more fully when we discuss the costs of inflation later in this book.

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INDEXATION