Question

present two reasons why high inflation is harmful to the economy.

Answer 1

One danger of higher inflation is that it impacts lower-income households and elderly marginalised people who may be working on a fixed income in a regressive way. If rates rise higher than wages, there would be a sharp reduction in real earnings. Inflation helps to redistribute profits and capital by sheltering the properties in forms that earn a fair return to classes that are more able to protect against inflation.
High inflation will also lead to higher borrowing rates for companies and individuals in need of loans and mortgages as capital markets attempt to shield themselves from rising prices and boost short- and long-term debt borrowing costs.

If the cost of living increases higher, high inflation places pressure on the government to raise the value of state pension and unemployment insurance and other welfare transfers.

If people look to defend their actual earnings, high inflation will lead to a rise in wage claims. This will lead to a spike in unit labour costs and reduced company income. However, not all workers belong to strong trade unions and can bid for better wages using collective bargaining power. A increase in real inflation can lead to an upward change in inflation rates (which can be modelled using the study of the Phillips Curve) which can be hard to eradicate until inflation is ingrained in an economy.