Indexing is one of those financial terms that quietly drives some of the most important decisions in both economics and investing. Whether you realise it or not, indexing affects your mortgage rates, your superannuation returns, and even how your wages keep up with rising prices. In 2025, as Australia adapts to economic shifts and new investment trends, understanding indexing is more relevant than ever.
What is Indexing? The Basics Demystified
At its core, indexing is the process of measuring and tracking changes in a specific variable—like prices, wages, or stock market performance—over time. An index is simply a statistical measure that represents the value of that variable at different points. The most common examples include:
- Consumer Price Index (CPI): Tracks changes in the price of a basket of goods and services, used to measure inflation in Australia.
- ASX 200 Index: Represents the performance of the top 200 companies on the Australian Securities Exchange.
- Wage Price Index (WPI): Measures changes in wages across the economy.
When economists or investors talk about indexing, they could mean creating or tracking these indices, or linking various payments and portfolios to them. The power of indexing lies in its ability to provide a transparent benchmark—whether for investment returns, policy adjustments, or contract negotiations.
Indexing in Economics: Policy, Inflation, and Everyday Impact
In 2025, indexing is more than a technical tool—it’s a policy cornerstone. The Reserve Bank of Australia (RBA) and the federal government use indices like the CPI to guide decisions on interest rates, welfare payments, and even tax brackets.
Key economic uses of indexing include:
- Inflation Adjustment: Many government benefits (such as Age Pension and JobSeeker) are indexed to inflation. This means payment amounts automatically rise with the CPI, helping recipients maintain purchasing power as prices climb.
- Wage Negotiations: Enterprise bargaining agreements and awards may include clauses that tie annual pay rises to movements in the Wage Price Index or CPI.
- Tax Brackets: In the 2025 Federal Budget, the government continued the practice of indexing income tax thresholds to inflation to prevent ‘bracket creep’—where rising incomes push taxpayers into higher brackets without real increases in purchasing power.
These uses of indexing help ensure economic policies and contracts remain fair and relevant, especially during periods of high inflation or economic volatility.
Indexing in Investing: Index Funds, Benchmarking, and Passive Growth
For investors, indexing has become a dominant strategy. Instead of trying to pick winning stocks or beat the market, many Australians now invest in index funds—managed funds or ETFs that aim to match, not outperform, a specific market index such as the ASX 200 or the S&P 500.
Why is indexing so popular among investors in 2025?
- Low Fees: Index funds typically charge lower management fees than actively managed funds, since they follow a predetermined basket of assets.
- Consistent Performance: Decades of data show that most active managers struggle to consistently beat their benchmark indices over the long term.
- Transparency: Investors know exactly what they’re getting: exposure to a broad segment of the market, rather than relying on a fund manager’s stock picks.
The shift to passive investing via indexing has been turbocharged by the rise of digital brokers and robo-advisors. According to ASFA data released in 2025, over 60% of new superannuation contributions are now allocated to index-tracking options, reflecting Australians’ growing preference for low-cost, long-term investment solutions.
Other Uses and 2025 Trends: Beyond the Basics
Indexing isn’t limited to mainstream economics or investing. In 2025, it’s being used in innovative ways:
- Green Indices: The ASX launched new ESG (Environmental, Social, Governance) indices, allowing investors to track and invest in companies with strong sustainability credentials.
- Rental Indexing: With housing affordability still a hot issue, some long-term leases and build-to-rent schemes now link rent increases to housing price or wage indices, rather than arbitrary annual hikes.
- Indexed Bonds: The Australian government continues to issue Treasury Indexed Bonds, where both the principal and interest payments are linked to the CPI, giving investors protection against inflation.
As Australia’s economy navigates higher-for-longer inflation and persistent global uncertainty, the role of indexing in both public policy and private portfolios is set to grow even further.
Conclusion: Why Every Australian Should Care About Indexing
Whether you’re a wage earner, a retiree, or a share market investor, indexing shapes your financial reality. It’s the invisible hand that ensures fairness in contracts, transparency in investing, and stability in economic policy. In 2025, with inflation, market volatility, and rapid financial innovation, understanding indexing is more than a textbook exercise—it’s a practical necessity for making informed money decisions.
