Plain English Meaning
An altimeter that does two jobs: it shows the pilot the altitude on the dial, and it also sends the altitude data to the transponder so controllers can see it on their radar screen.
Full Definition
An altimeter that, in addition to displaying altitude to the pilot, electronically sends the aircraft's pressure altitude to the transponder so it can be transmitted to air traffic control as Mode C altitude information.
Context Anchor
Seen in instrument flying, transponder, and Mode C altitude-reporting discussions.
Derivation
‘Encoding’ comes from ‘code’ — turning information into a signal that can be transmitted. The altimeter encodes the altitude reading into a digital signal the transponder can send out.