While the barometric scale on the altimeter allows for correction for nonstandard pressure, altimeters are not corrected for nonstandard temperature. This works fine for aircraft separation, since we are all flying with the same amount of vertical error from the actual altitude we were assigned to maintain. Temperature variations can become problematic for terrain and obstruction clearance, however, in cold weather.
Since air becomes more dense as it gets colder, the pressure levels become compressed together in cold weather conditions. This means you have to climb the aircraft to a lower altitude to see the same drop in pressure. For example, with a temperature of -20 degrees Celsius, the altimeter would indicate 5,000 feet when your true altitude is actually just 4,290 feet.
This is because that the altimeter always assumes standard temperature. You climb up to 4,290 feet MSL on this cold day, and the altimeter is looking at the ambient pressure there as if it were a standard day and not a cold one. It is telling you that you have climbed through enough pressure drop so that you should be at 5,000 feet.
As a result, cold temperatures can place the aircraft at a true altitude that is lower than indicated. On very cold days, this could place the aircraft in an unsafe proximity to terrain, such as during cruise flight through mountainous territory or while on instrument approach. In the United States, this fact rarely affects operations. In colder areas, however, it has a significant impact. In Canada, for example, many operators correct for temperature in order to ensure obstruction clearance during an instrument approach.
Altitude keeping errors could result if the pilot fails to keep the altimeter set to the current setting. For example, suppose an aircraft were flown from an area where the altimeter setting was 30.23 inches to one where it was 29.74 without resetting the altimeter. At the first location, the ambient pressure at 5,000 feet is about 25.23 inches. However, at the second location, the 5,000 foot ambient pressure is about 24.74 inches. But, the pilot is still maintaining an altitude where the pressure is 25.23 inches. As a result, without realizing it, the pilot has actually descended to 4,510 feet MSL in the course of flying between these two localities.
For this reason, FARs require pilots set the altimeter to a station within 100 nm or the most appropriate station available if this is not possible. At higher altitudes where terrain and obstruction clearance is not a concern, however, aircraft separation becomes the primary reason for maintaining a specific altitude. As a result, an altimeter setting of 29.92 inches is used by all aircraft operating at or above 18,000 feet MSL. This saves pilots and controllers and pilots from having to deal with changing altimeter settings multiple times as they fly on long cross countries.
The easiest way to remember altimeter errors is to remember the saying, "High to low, hot to cold, look out below". If you fly from high to low pressure without resetting your altimeter, or from hotter air into colder air, while maintaining the same indicated altitude, the aircraft will descend.
The inverse of this statement could be said to, but is not really a factor for safety. If you fly from low pressure to high pressure or from cold air to hot air while maintaining the same indicated altitude, the airplane will be at a higher than indicated altitude.
The altimeter only indicates true altitude when operated at standard pressure and temperature.
An encoding altimeter supplies the transponder with pressure altitude for transmission to air traffic control via Mode C. The air traffic control equipment applies the local altimeter setting to each target to present the aircraft's altitude to the controller.