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.
