Legal Definitions - indexation

Indexation refers to the practice of automatically adjusting a financial value, such as a payment, price, or wage, over time based on changes in a specific economic indicator or "index." The primary purpose of indexation is to maintain the real value or purchasing power of that amount, often to counteract the effects of inflation.

Here are some examples illustrating how indexation works:

• Child Support Payments: Imagine a court order for child support that includes a clause stating the monthly payment will be adjusted annually based on the Consumer Price Index (CPI). If the CPI, which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, increases by 3% in a given year, the child support payment would automatically increase by 3% for the following year. This ensures that the support payments retain their purchasing power over time, helping to cover the rising costs of raising a child.

• Commercial Lease Agreements: A business signs a long-term lease for office space. The lease agreement specifies an initial monthly rent, but also includes a provision for annual rent increases tied to a specific inflation index, such as the Retail Price Index (RPI) or a similar local cost-of-living index. Each year, the landlord calculates the new rent by applying the percentage change in the agreed-upon index to the previous year's rent. This mechanism protects the landlord from the erosion of rental income due to inflation, while providing the tenant with a predictable method for rent adjustments.

• Government Pension Adjustments: Many government-provided pensions or social security benefits are subject to indexation. For instance, a retired public servant's monthly pension might be indexed to the average wage growth in the public sector or a national cost-of-living adjustment (COLA). If the chosen index shows a 2.5% increase in a particular year, the retiree's pension payment will automatically rise by 2.5% for the next year. This ensures that the pension continues to provide a comparable standard of living for the recipient, preventing its value from being significantly diminished by inflation over their retirement years.