What Is Indexation in a Contract?

In statistics relating to national economies, the indexation of contracts also called "index linking" and "contract escalation" is a procedure when a contract includes a periodic adjustment to the prices paid for the contract provisions based on the level of a nominated price index.

What does indexation mean in a contract?

A procedure whereby a long-term contract for the provision of goods or services includes a periodic adjustment to the prices paid for the goods or services based on the increase or decrease in the level of a nominated price index. The purpose of indexation is to take inflationary risk out of the contract.

What is indexation example?

Social Security payments, for example, are indexed to the annual increase in the Consumer Price Index. ... In such a case, the original purchase price is adjusted for inflation when calculating long-term capital gains that will be taxed when those debt funds are sold.