WHAT IMPACT DOES HIGH INFLATION HAVE ON FIRMS AND THEIR PROFITS?

In business when costs increase they are passed on to customers. So if wages/salaries and other production costs increase because of inflation, profits are not directly affected. Especially if inflation is accompanied by increasing demand for what these firms produce. This is normally the case.

When the central bank increases interest rates to fight inflation, demand for products and services drops. This causes a big drop in profits and firms have to cut production. They lay off staff to reduce the salary/wages bill, income falls and demand drops further. Firms battle to sell the products they have made and may have to reduce prices, this on the other hand is called deflation.

Inflation itself does not affect profits. But fighting inflation can be devastating to the profitability of firms having to deal with falling demand for their products.