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When prices change, the value of fixed payments can reduce over time. The CPI can be used to calculate how to adjust these payments to compensate for inflation. This process is called indexation.
Example In 2000 you began to receive a quarterly allowance of $1,000 that will be adjusted (indexed) using the CPI so that its current value will not change over time. What would that index-adjusted allowance be in 2002?
Method
- Find the index numbers for 2000 and 2002 from the
 table below.
- Use the index numbers in this formula to calculate the effect of inflation on your allowance.
| $amount |
x |
later index number |
|
|
earlier index number |
= $1,060.78 ( )
Result Your allowance would increase to $1,060.78 in 2002 if it is adjusted for inflation (indexed).
Other adjustments
Other examples of indexation using the CPI include:
- Annual adjustments to government income support benefits (domestic purposes, sickness, unemployment, invalid’s, widow’s, and transitional retirement benefits).
- Businesses establishing how much compensation should be included in contracts to allow for price increases beyond their control (for example, transportation).
- Inflation-related rent and wage increases.
Have a go yourself
The Reserve Bank of New Zealand's Inflation Calculator allows you to work out the inflation rate for an amount and time period you specify.
Back to Inflation and the CPI - more detailed explanations
Using the CPI - examples and worksheets
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