What does it mean when a price, wage, or interest rate is adjusted automatically for inflation?

When a price, wage, or interest rate is adjusted automatically for inflation, it is referred to as being "indexed." This means that the value is linked to a specific price index, such as the Consumer Price Index (CPI), which measures the average change over time in the prices paid by consumers for a basket of goods and services. By indexing these amounts, individuals or entities ensure that their purchasing power is maintained over time despite the effects of inflation. For example, if wages are indexed to inflation, workers will receive increases that adjust for the cost of living, ensuring that their real income does not decrease as prices rise.

The concept of indexing is crucial in economic discussions about contracts, social security payments, and various financial instruments that aim to protect against the loss of purchasing power due to inflation. It establishes a method for economic actors to manage the risks associated with inflation, ultimately promoting stability in financial planning and contracts. Other terms provided in the question, such as substitution bias, quality and new goods bias, and menu costs, refer to different economic concepts that do not relate directly to automatic adjustments for inflation.