Indexation and inflation
- Does indexation offer a solution to inflation and its related problems?
- In a way, it does. It reduces many costs of inflation although some costs remain, for example, menu cost and shoe leather costs. It also reduces pressure on government to tackle the problem of inflation directly.
- Indexation may hinder government attempts to reduce inflation because indexation builds in cost structures, such as wage increases, which reflects past changes in prices.
- Although indexation can ease the pain of inflation, it is not a cure for it.