verðfestu

Verðfestu is an Icelandic term that translates to "indexation" or "inflation adjustment" in English. It refers to the practice of adjusting financial values, such as wages, prices, interest rates, and loan repayments, to account for changes in the general price level, typically measured by inflation. The primary goal of verðfestu is to maintain the purchasing power of money over time.

In Iceland, indexation has historically played a significant role in the economy. Many contracts, including those for housing loans, wages, and pensions, are linked to an index, most commonly the consumer price index (vísitala neysluverðs). When inflation rises, the values of these contracts are automatically increased by a corresponding amount, preventing a decline in their real value. Similarly, if deflation were to occur, these values would decrease.

The mechanism of verðfestu aims to provide stability and predictability in financial planning. It is intended to protect individuals and businesses from the erosion of their savings and income due to rising prices. However, it can also contribute to inflationary pressures if not managed carefully, as it can create a wage-price spiral where rising wages lead to higher prices, which in turn lead to demands for higher wages. The extent and application of verðfestu have been subjects of ongoing debate and policy adjustments in Iceland's economic history.