1

EFFECTS OF PRODUCER PRICE INDEX

MOVEMENTS ON FINANCIAL
PERFORMANCE OF SMALL AND
MEDIUM SUPERMARKETS IN MOSHI
MUNICIPALITY
Abstract

This study aimed to determine the effects of PPI movements on the financial performance of small and
medium supermarkets. Anchored in the Cost-Push Inflation Theory, a convergent parallel mixed-methods
design was applied, integrating quantitative and qualitative approaches for comprehensive analysis. The
target population comprised 450 small and medium supermarkets employees, with a sample size of 212
respondents, including managers, owners, cashiers, and storekeepers, selected through simple random and
purposive sampling. Data were collected using structured questionnaires, in-depth interviews, and
financial performance reports from 2020–2024. Instrument validity was ensured through expert review,
while reliability tests yielded Cronbach’s Alpha values between 0.72 and 0.78. Quantitative data were
analyzed using descriptive statistics (frequencies, percentages, means, and standard deviations) and
multiple regression in SPSS version 27, while qualitative data were examined through contextual
analysis, with coding and categorization to identify emerging themes. Findings revealed that demand
constraints (Beta = 0.648, p < 0.001) were the strongest predictors of financial performance, whereas PPI
cost pressures alone were not statistically significant. Nonetheless, descriptive results indicated that PPI
increases indirectly constrained financial outcomes by raising operational costs, reducing product variety,
and forcing operational cutbacks. Adaptive strategies such as innovation, quality improvement, and cost
optimization were widely adopted to mitigate inflationary shocks. The study concludes that while
demand-side factors predominantly influence supermarket performance, PPI movements necessitate
operational adjustments critical for resilience. It recommends investment in inventory management
technologies, strategic sourcing, and policy measures such as tax reliefs and subsidized supply chains.
Keywords: Producer Price Index, Financial Performance, Small and Medium Enterprises, Supermarkets, Cost-Push
Inflation Theory
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1. Introduction

The Producer Price Index (PPI), a key macroeconomic indicator that measures the
average change in selling prices received by domestic producers for their output, plays a vital
role in shaping business environments. Increases in the PPI typically translate into higher costs
of production inputs such as raw materials, fuel, and logistics. For Small and Medium
Enterprises (SMEs), which often operate under constrained capital and narrow profit margins,
these shifts can result in increased operational costs and weakened financial performance
(European Commission, 2023). For SMEs engaged in retail activities such as supermarkets rising
producer prices translate directly into surging input costs for goods, packaging, transportation,
and utilities. These increases are particularly damaging the SMEs, which often lack the financial
flexibility, bargaining power, and economies of scale enjoyed by large firms (Mwamkonko &
Kulwijila, 2024). Supermarkets especially those located in rapidly urbanizing towns like Moshi
Municipality are particularly vulnerable due to their dependence on upstream supply chains.

Supply chain disruptions and geopolitical tensions, such as those caused by the Russia–
Ukraine conflict and ongoing post-pandemic challenges, have significantly affected small and
medium-sized enterprises (SMEs) worldwide including supermarkets. These disruptions often
lead to increased input costs, reflected in rising Producer Price Index (PPI) figures, and create
logistical bottlenecks, supply shortages, and price volatility that directly threaten SMEs
(supermarkets) profitability and operational stability (Alhitmi & Ndambuki, 2023). Small
supermarkets, due to their limited resources, are particularly vulnerable to such shocks and often
experience sharper negative effects compared to larger firms. SMEs tend to adopt reactive or
"wait-and-see" strategies, gathering information to reduce uncertainty, but must also invest in
resilience-building measures such as supply chain diversification, digital logistics tools, and
flexible sourcing to withstand future disruptions (Vinh, Bach & Phung, 2025). Geopolitical risks
ranging from wars and sanctions to trade disputes can cause delivery delays, production
stoppages, and increased costs, underscoring the need for adaptive management and strategic
planning.

Producer price fluctuations have also significantly affected SME operations, especially
within urban retail markets in East Africa, Karuku (2023), investigated inflation effects on
Kenyan SMEs and found that rising input costs undermined export competitiveness and local
 3

sales for SMEs engaged in retail and FMCGs. According to the East African Business Council
(2022), small retailers across Kenya, have reported reduced profit margins and disruptions in
stock acquisition due to rising production and transport costs. Moreover, inflation-driven
increases in the Producer Price Index (PPI) have compelled many SMEs to scale down
operations, reduce their workforce, or shift to lower-cost, lower-quality suppliers actions that
erode service delivery and consumer satisfaction. In Uganda, rising input costs for raw materials,
transportation, and energy have already forced SMEs to cut labor and downgrade suppliers as
coping measures (Matovu, 2023)

In Tanzania, the effect of rising producer prices has been felt acutely among SMEs,
especially supermarkets in emerging towns. According to the National Bureau of Statistics
(2024), Tanzania’s PPI rose by over 13% between 2021 and 2023, largely due to cost surges in
the transport, agricultural, and manufacturing sectors. The Producer Price Index (PPI) in
Tanzania, as reported by the National Bureau of Statistics (NBS) Tanzania, experienced
fluctuations from 2020 to 2024. In 2024, the PPI saw a modest annual increase of 0.35%. There
was a slight quarterly decrease between Q3 and Q4 of 2024, but the mining and quarrying sector
remained relatively stable, while manufacturing saw a small annual growth. The water supply
sector within utilities saw a significant surge. The overall PPI is predicted to have a slow growth
of around 1.0% to 2.0% in 2025.

Molela, Kasoga and Ismail (2024), revealed that Tanzanian SMEs face significant pressure from
supply-side cost increases, which erode profitability and hinder long-term planning. Their study
showed that most SMEs lack dynamic pricing strategies and are unable to offset rising input
costs without affecting customer retention. These financial strains are even more pronounced in
retail-oriented enterprises like supermarkets, which rely on consistent stock turnover and stable
consumer purchasing power. Furthermore, informal competition and limited supplier networks
aggravate financial vulnerabilities, making these businesses less resilient to PPI shocks.

Despite ongoing efforts to strengthen the SME sector through policy initiatives, such as
financial inclusion programs and SME capacity-building projects, little attention has been paid to
how macroeconomic factors like the PPI shape operational realities for small businesses. As
Bigambo, Mwakalobo and Msuya (2023), argue that localized research is crucial in designing
context-sensitive interventions that address the specific challenges SMEs face due to upstream
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cost volatility. In Moshi Municipality, where economic growth is closely tied to the performance
of retail SMEs, particularly small and medium supermarkets, it is critical to examine how
movements in producer prices affect their financial performance. This study, therefore, sought to
fill this essential research gap.

1.2. Statement of Problem

Small and medium supermarkets in Tanzania are increasingly struggling with rising operational
costs, largely driven by movements in the Producer Price Index (PPI). According to the National
Bureau of Statistics (NBS, 2023), Tanzania experienced an average consumer price inflation of
9.4% over the ten-year period leading up to 2022, which surpassed the regional average of 4.8%.
Tanzania’s PPI has shown consistent quarterly increases, with notable spikes in food and manufacturing
sectors between 2023 and 2025. These cost pressures threaten financial sustainability, limit stable pricing,
and reduce competitiveness among SMEs. Producers, suppliers, and consumers have voiced their
frustrations over the escalating prices of raw materials essential for production (Sanga, Kongolo
and Mnongya, 2023). The poor performance of some supermarkets marked by closures, reported
losses, or minimal profits such as the exit of Nakumatt and Shoprite from the Tanzanian market,
highlights how increasing operational costs are directly tied to business sustainability (The East
African, 2020).

While national-level data shows inflationary trends and SME vulnerabilities, localized research
examining how PPI movements affect supermarket performance remains scarce. In Moshi Municipality,
where trade is the lifeline of the local economy and over 50% of the population depends on retail and
wholesale outlets for income, supermarkets face mounting challenges. A study by Karmali (2016) found
that mini supermarkets in Moshi struggle with high taxes and cost pressures, which hinder their role in
poverty reduction. Also, Lewis, Mayala and Ogoti (2018), observed that proper accounting practices
significantly influence the financial performance of supermarkets, suggesting that cost management is a
key determinant of sustainability. Ssempala and Semboze (2021), demonstrated a strong negative
correlation between inflation closely tied to the PPI and Tanzania’s economic growth, further
suggesting that cost-push factors undermine productivity and profitability at both micro and
macro levels.

Despite Moshi’s strategic role as a commercial hub in northern Tanzania, no empirical studies
have yet explored the link between PPI movements and supermarket performance in this region. This gap
in localized evidence makes it difficult for business owners and policymakers to develop targeted
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interventions. Therefore, the study sought to assess the effects of Producer Price Index (PPI) movements
on the financial performance of small and medium supermarkets in Moshi Municipality, aiming to
provide actionable insights for improving cost management and business resilience.

1.3. Objective of the study

The main objective of this study was to determine the effects of producer price index
movements on financial performance of small and medium supermarkets in Moshi municipality.
1.4. Research Question

What are the effects of the producer price index movements on the financial performance
of small and medium supermarkets in Moshi municipality?

1.5. Research Hypotheses

(H₀) PPI movements have no significant effect on the financial performance of Small and
Medium Supermarkets.

1.6. Significance of the study

The study aimed to examine how movements in the Producer Price Index (PPI), as a
measure of inflation, affected the financial performance of small and medium supermarkets
operating within Moshi Municipality. By analyzing how inflation influenced consumer
purchasing power and spending patterns, the research provided critical insights for business
vendors and small and medium supermarkets to adapt their pricing strategies and product
offerings accordingly. The findings enabled SMEs to anticipate changes in revenue and
profitability caused by inflationary pressures, thereby facilitating more effective financial
planning such as price adjustments, cost management, and inventory optimization. Furthermore,
the study showed the importance of collaboration among SMEs, suppliers, and other industry
stakeholders to mitigate supply chain disruptions caused by inflation. Enhanced coordination and
information sharing strengthened the overall business ecosystem within Moshi Municipality.
Additionally, the research shed light on how fluctuations in exchange rates affected SME
profitability, investment decisions, and financial health, guiding entrepreneurs on capital
expenditures, loan restructuring, and financing strategies. The study’s findings not only aided
SMEs in practical financial decision-making but also contributed to shaping inflation-related
 6

policy frameworks and provided empirical support for relevant economic theories linked to
producer prices and firm performance.

2. Literature Review

Johnson and Martinez (2023), conducted a study to examine the effect of Producer Price
Index (PPI) increases on retail profitability among small and medium enterprises (SMEs) in
urban areas of California, USA. A cross-sectional research design was employed, utilizing a
quantitative approach with a sample size of 200 retail SMEs selected through stratified random
sampling to ensure comprehensive representation across different urban sectors. Data analysis
was conducted using SPSS (Statistical Package for the Social Sciences) version 28.0, employing
descriptive and inferential statistics. The study was conducted in California to address how retail
SMEs can be affected by the increase and the decrease of the PPI, but there is a gap concerning
the area of the study and how increase of PPI can affect the performance of those SMEs in
supermarkets. Also, the findings shows that there is a need for further investigation into how PPI
changes uniquely affect retail operations in diverse geographic and economic contexts.
Therefore, the current study will focus on looking at the effects of the increase in producer price
index on financial performance of SMEs of the selected supermarkets Moshi municipality.

Thompson and Ramirez (2020), conducted a study to analyze the effects of Producer
Price Index (PPI) changes on the profitability of small and medium enterprises (SMEs) through a
sectoral lens. The study population was 150 enterprises selected from various sectors, including
manufacturing, retail, and services. They find that fluctuations in the PPI significantly influence
the cost structures and financial performance of SMEs, highlighting that rising production costs
compel these businesses to adjust pricing strategies and implement cost-control measures to
maintain profitability. The study emphasizes the necessity for tailored approaches, as the impact
of PPI varies across different sectors. Their recommendations suggest that policymakers should
consider sector-specific analyses when formulating economic policies to mitigate adverse
effects. The study provide valuable insights into the effects of Producer Price Index (PPI)
changes on the profitability of small and medium enterprises (SMEs) in Ghana, the study focuses
on SMEs across various sectors, such as manufacturing, retail, and services, but does not
specifically address the supermarket sector, which operates under unique market dynamics and
consumer behaviors, also the study focused on Ghana in which it cannot solve the challenges
 7

faces supermarkets in Tanzania. Thus, this study aims to fill these gaps by determining the
effects of the increase in PPI on the financial performance of SMEs within the supermarket
sector of Moshi Municipality, providing insights that are both locally relevant and applicable to
similar contexts.

Oteh (2024), conducted study on the effect of the increase in the producer price index
(PPI) on the financial performance of small retail shops in Nigeria. The research utilized a
mixed-methods approach that combined quantitative analysis of PPI data and financial
performance metrics with qualitative interviews of 100 small manufacturers, employing stratified
random sampling to ensure representation across different sectors. Research tools included
structured questionnaires and semi-structured interviews, while data analysis utilized statistical
software for quantitative data and thematic analysis for qualitative insights. The findings
revealed a significant correlation between rising PPI and decreased profit margins, with many
SMEs facing challenges in passing on increased costs to consumers. However, a notable gap
exists in the literature regarding the specific effects of PPI increases on the financial performance
of SMEs in the supermarket sector, particularly in localized contexts such as Moshi
Municipality. The study aims to fill that gap by determining the effects of increased PPI on the
financial performance of selected supermarkets in Moshi Municipality, contributing to a more
comprehensive understanding of how inflationary pressures affect this vital sector.

Karuku (2023), conducted a study on the effects of Producer Price Index (PPI)
fluctuations on financial performance in small and medium manufacturing enterprises in Kenya
highlights the significant negative correlation between rising PPI and profitability, emphasizing
the challenges SMEs face in absorbing increased production costs. While this research provides
valuable insights into the manufacturing sector, a notable gap exists concerning the specific
impacts of PPI increases on the financial performance of SMEs in the retail sector, particularly
within the supermarket context in Moshi Municipality, Tanzania. The findings underscore the
necessity for further research to explore how PPI fluctuations uniquely affect supermarket SMEs,
as these enterprises may operate under different market dynamics and consumer behaviors
compared to manufacturing SMEs. Addressing this gap is crucial for developing tailored policy
interventions and support mechanisms that enhance the resilience and competitiveness of retail
SMEs in the face of economic pressures related to PPI changes.
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Mwananchi and Kilonzo (2023), conducted a study on the effects of the increase in
Producer Price Index (PPI) on financial sustainability in small food processing enterprises in
Tanzania. The study employed a descriptive research design conducted in Moshi Municipality,
focusing on a target population of 150 small food processing enterprises selected through
stratified random sampling to ensure diverse representation. Research tools included structured
questionnaires and semi-structured interviews, with a strong emphasis on reliability and validity
ensured through pilot testing and expert reviews. The findings revealed a significant negative
impact of rising PPI on profit margins and operational sustainability, with many businesses
struggling to maintain profitability amidst increased costs. However, a notable gap exists in the
literature regarding the specific effects of PPI increases on the financial performance of SMEs in
the supermarket sector, particularly within the same geographic area of Moshi Municipality. The
study aims to address that gap by investigating the effects of increased PPI on the financial
performance of selected supermarkets in Moshi Municipality, contributing valuable insights for
both academic understanding and practical policy development.

Chirwa, Mtei and Nyarandu (2023), analyzed the effects of Producer Price Index (PPI)
fluctuations on the profitability of small agricultural businesses in Tanzania, specifically
focusing on the Moshi Municipality. Utilizing a mixed-methods approach, the research involved
a target population of 120 small agricultural enterprises, selected through simple random
sampling. The study employed structured questionnaires for quantitative data and semi-
structured interviews for qualitative insights, ensuring reliability and validity through pilot
testing with six respondents and expert reviews. Data analysis was conducted using SPSS
version 28.0 and thematic analysis. The findings revealed a significant correlation between rising
PPI and decreased profitability, highlighting challenges faced by small agricultural businesses in
maintaining financial stability due to increased production costs. While the study sheds light on
agricultural enterprises, there is a need to explore how PPI fluctuations affect the financial
dynamics of supermarkets in Moshi Municipality, thereby contributing to a more comprehensive
understanding of the broader implications of PPI changes across different business sectors. This
gap underscores the importance of further research aimed at determining the effects of PPI
increases on the financial performance of SMEs, particularly in the supermarket context.
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3. Methodology

This study adopted a convergent mixed-methods design, enabling simultaneous collection

and integration of qualitative and quantitative data to examine the impact of Producer Price
Index (PPI) increases on the financial performance of SMEs in Moshi Municipality. The target
population consisted of 450 small and medium supermarkets employess, with a sample size of
212 respondents determined using Yamane’s formula (1967) and three (03) key informants.
Participants included supermarket managers, owners, cashiers, and storekeepers, selected
through a combination of simple random and purposive sampling techniques. Data were gathered
from primary sources using structured questionnaires to supermarket employees and interviews
for owners and managers, and secondary sources such as financial records. Instrument validity
was ensured through expert review by Mwenge Catholic University specialists, and reliability
was confirmed via Cronbach’s Alpha, with coefficients ranging from 0.72 to 0.78, and values
above 0.8 indicating high reliability.

Quantitative data were coded, classified, and organized using SPSS version 27 and
presented through descriptive statistics specifically frequencies, percentages, means, and
standard deviations while qualitative data were examined through contextual analysis, with
coding and categorization to identify key themes. Triangulation, prolonged engagement, and peer
review enhanced qualitative reliability. Multiple regression analysis was also conducted to
explore the relationship between PPI and financial performance. Ethical standards were
rigorously upheld, including informed consent, confidentiality through coded responses, and
secure data handling. All academic sources were properly cited using APA 7th edition
guidelines.

4. Findings and Discussion

This section presents, interprets, and discusses the findings of the study on how increases in the
Producer Price Index (PPI) affects the financial performance of Small and Medium Enterprises
(SMEs), with a focus on selected supermarkets in Moshi Municipality, Tanzania.

Table 1. Response rate

Categories Sample Size Respondents Respondents rate
Supermarket Employees 212 189 89.1%
(Managers, Cashiers,
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Storekeepers)
Source: Field Data (2025)

The feedback collected from supermarket managers, cashiers, and storekeepers in Moshi
Municipality resulted in completing and returning 189 out of 212 questionnaires which translates
to 89.1%. The remaining 23 questionnaires (10.9% non-response) were not responded to due to
overwhelming business volume during peak hours, unwillingness to share information due to
confidentiality issues, and in a busy retail environment, there were overly misplaced or carelessly
handled survey forms. Also, some respondents may not have had the requisite high level, or
confidence to provide operational details without manager approval. Regardless of these factors,
the strong overall engagement and high response rate bolstered the reliability in regard to the
study.

4.1 Demographic characteristics

Three key demographic characteristics of employees in selected supermarkets within

Moshi Municipality were assessed: gender, education level, and work experience. These factors
provide information into the workforce composition and its potential influence on financial
decision-making, pricing strategies, and adaptability to PPI fluctuations. The findings are
presented in table 2 below.
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Table 2. Demographic characteristics

Items f % Total
Gender Male 75 39.7
Female 114 60.3 189
Level of Education Certificate 67 35.4
Diploma 70 37.0
Bachelor Degree 41 21.7
Postgraduate Diploma 8 4.2
Masters 3 1.6 189
Working experience Below 2 years 30 15.9
3-5 years 104 55.0
6-10 years 46 24.3
Above 10 years 9 4.8 189
Source: Field Data, (2025)

As indicated in table 2, the gender distribution of respondents was slightly skewed in

favor of females, with 114 (60.3%) being female and 75 (39.7%) male, out of a total of 189
participants. This distribution reflects the active participation of women in the supermarket retail
space within Moshi Municipality. The predominance of female respondents is significant, as it
shows that many women are either managing or employed within SMEs affected by the
increasing producer price index. Their experiences and perspectives offer important information
into how inflationary pressures on supplier costs are impacting business operations, pricing
decisions, and overall financial health in a sector where gender inclusivity plays a growing role.

In terms of education, the majority of respondents held Diplomas (37.0%) and

Certificates (35.4%), followed by Bachelor’s Degrees (21.7%), Postgraduate Diplomas (4.2%),
and only (1.6%) with Master’s Degrees. This indicates that most participants possess practical,
middle-level qualifications, which are typical within operational roles in retail supermarkets. The
educational background of respondents is vital in shaping their ability to understand financial
indicators, respond to cost increases, and implement coping strategies. Those with higher
education are likely to have more exposure to financial analysis and price modeling, but the
dominance of diploma and certificate holders suggests that practical experience and on-the-
ground knowledge play a larger role in how SMEs navigate price fluctuations caused by shifts in
the producer price index.

Regarding work experience, the majority of respondents 55.0% had between 3 to 5 years
of experience, followed by 24.3% with 6–10 years, 15.9% with less than 2 years, and 4.8% with
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more than 10 years of experience. These findings show that most of the respondents were
relatively experienced in the field, with over 79% having three or more years of service. This
level of exposure is significant in relation to the study’s focus, as it suggests that many
participants have witnessed firsthand the effects of rising producer prices over multiple fiscal
cycles. Their experience equips them to assess the financial implications of cost increases on
profit margins, stock decisions, and pricing strategies. Moreover, their familiarity with market
trends and customer behavior gives credibility to their observations about how rising input prices
affect both operational efficiency and long-term sustainability of SMEs in the retail sector.

Table 4. Effects of the Increase in the Producer Price Index (PPI) on the Financial Performance
of Small and Medium Supermarkets in Moshi Municipality (n=189)
Key: SD (1) = Strongly Disagree, D (2) = Disagree, N (3) = Neutral, A (4) = Agree, SA (5) =
Strongly Agree, x̄ = mean, Std= Standard Deviation
S/N Effects of the Increase in the SA A N SD D x SD
Producer Price Index (PPI) on the
Financial Performance of Small and
Medium Supermarkets f % f % f % f % f %
i An increase in the Producer Price 21 11.1 10 53.4 39 20.6 22 11.6 6 3.2 3.57 .94
Index (PPI) can lead to higher 1
product quality in supermarkets
ii Increase of the costs due to the PPI 46 24.3 10 55.0 31 16.4 7 3.7 1 0.5 3.98 .77
are often passed on to consumers in 4
a justified manner
iii The financial performance of 52 27.5 84 44.4 34 18.0 15 7.9 4 2.1 3.87 .97
supermarkets improved as they
adapt to changes in the PPI
iv SMEs in supermarkets have become 34 18.0 72 38.1 46 24.3 20 10.6 17 9.0 3.45 1.16
more competitive due to the
challenges posed by the PPI
v Increase in the Producer Price Index 39 20.6 68 36.0 55 29.1 13 6.9 14 7.4 3.55 1.11
(PPI) made it difficult for
supermarkets to maintain reasonable
prices for consumers
vi Rising costs due to the PPI 57 30.2 78 41.3 36 19.0 13 6.9 5 2.6 3.89 .99
negatively affect the financial
performance of supermarkets
vii Increase in PPI led to a decrease in 64 33.9 79 41.8 34 18.0 11 5.8 1 0.5 4.02 .89
the variety of products available in
supermarkets
viii Supermarkets struggle to balance 48 25.4 95 50.3 28 14.8 12 6.3 6 3.2 3.88 .96
pricing and quality due to rising
costs from the PPI
ix The financial burden of increased 48 25.4 83 43.9 46 24.3 11 5.8 1 0.5 3.87 .87
PPI costs leads SMEs to reduce their
operations
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x The rise in the PPI encourages 49 25.9 89 47.1 28 14.8 16 8.5 7 3.7 3.83 1.02
supermarkets to innovate and
improve their offerings
Source: Field Data, (2025)

The results in table 4 reveals that 53.4% of respondents agreed, and 11.1% strongly
agreed, that an increase in the Producer Price Index (PPI) can lead to higher product quality in
supermarkets. A minority (11.6% disagreed and 3.2% strongly disagreed) perceived otherwise.
The mean score of 3.57 and standard deviation of 0.94 suggest moderate agreement and
relatively close clustering around the mean. This implies that while PPI increases are seen as cost
pressures, some supermarket owners adapt by improving product quality to justify higher
pricing. These findings align with the Cost-Push Inflation Theory, which asserts that producers
facing increased costs often pass them onto consumers through price hikes. However, to
maintain competitiveness, especially in differentiated markets like supermarkets, firms may
improve product quality to align perceived value with the new prices (Friedman, 1968; Keynes,
1936). Osei and Tetteh (2023), observed that SMEs often respond to rising costs by improving
service or product quality to maintain consumer loyalty in competitive sectors. While their study
emphasized small retail shops in Nigeria, similar adaptive strategies are apparent in supermarkets
in Moshi Municipality. This implies that in inflationary environments, SMEs may not always
compromise on quality. Instead, they may use the opportunity to innovate and reposition their
offerings, which can enhance customer satisfaction and retention despite higher prices.

The results in table 4 also shows a strong agreement among respondents, with 55.0%
agreed and 24.3% strongly agreed that cost increases due to PPI are often passed on to
consumers justifiably. Only 3.7% disagreed and 0.5% strongly disagreed. The high mean score
of 3.98 and a low standard deviation of 0.77 reflect general agreement on this perception. This
strongly supports Cost-Push Inflation Theory, which posits that when production or acquisition
costs increase, businesses are compelled to raise consumer prices to protect profit margins. The
supermarket sector’s need to remain viable despite shrinking margins necessitates such pricing
adjustments. This result is supported by Thompson and Ramirez (2020), who noted that SMEs
facing rising PPI adjusted prices to consumers as a rational response to protect profitability.
Though their study spanned multiple sectors, it demonstrated the widespread application of this
behavior. This implies that supermarkets in Moshi Municipality transparently adjust prices in
response to upstream cost pressures, indicating both rational pricing behavior and potential
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justification in the eyes of consumers. This adaptation is critical for financial sustainability in the
face of inflationary pressures.

The findings reveals that 44.4% agreed and 27.5% strongly agreed that financial
performance improved as supermarkets adapted to PPI changes. A mean score of 3.87 and a
standard deviation of 0.97 reinforce the positive perception that adaptive strategies in response to
inflation can yield financial benefits. This aligns with Cost-Push Inflation Theory, especially in
its practical application firms that adjust operations, pricing, and sourcing strategies can maintain
or even improve performance under inflationary stress. It suggests that inflation can drive
efficiency and innovation. In line with this, Johnson and Martinez (2023), found that SMEs that
responded proactively to rising costs through strategic sourcing and pricing were able to retain or
improve their profitability, despite PPI pressures. This implies that adaptability is a critical
success factor for SMEs in Moshi’s supermarket sector. Rather than succumbing to inflationary
challenges, those that embrace strategic transformation can bolster their financial performance,
illustrating resilience and managerial capability.

The responses indicates that 38.1% agreed and 18.0% strongly agreed that supermarkets
became more competitive as a result of PPI challenges. However, 10.6% disagreed and 9.0%
strongly disagreed. A mean score of 3.45 and a higher standard deviation of 1.16 suggest a more
divided view among respondents. This moderately supports Cost-Push Inflation Theory, as rising
costs can drive competition among firms striving to retain customers while managing shrinking
margins. The theory indicates that SMEs will react differently based on their operational
capacity, leading to variable competitiveness. These findings reflect Chirwa et al. (2023), and
Mwananchi and Kilonzo (2023), who emphasized the uneven effect of PPI on different
enterprises. While some firms successfully adapt and become more competitive, others struggle,
especially without access to adequate resources or government support. This implies that while
inflation can push some supermarkets to innovate and gain competitive advantage, others may
falter. Hence, policy support such as cost-stabilization interventions or managerial training is
vital to ensure more SMEs in Moshi can thrive amid rising PPI.

The findings in table 4 shows that 36.0% of respondents agreed and 20.6% strongly
agreed that the increase in PPI made it difficult for supermarkets to maintain reasonable prices
for consumers. Conversely, 6.9% disagreed and 7.4% strongly disagreed. The mean score of 3.55
 15

and standard deviation of 1.11 reflect moderate agreement, with some variation in responses.
This suggests that many supermarket operators were experiencing direct pressure from upstream
cost increases, making it harder to offer competitive prices. The relatively high standard
deviation implies differing capacities among supermarkets to absorb or transfer these cost
burdens. Interviews with Key Informants corroborated these findings. One noted,

"When consumer purchasing power declines, supermarkets face immediate drops in sales
volume and revenue. Many customers shift to cheaper alternatives or reduce non-
essential purchases, squeezing profit margins further. This is especially damaging for
SMEs that lack economies of scale to absorb shocks. Over time, reduced footfall and
smaller basket sizes erode liquidity, making it harder to restock or invest in competitive
pricing strategies." (Interview with key informant 1, July 1, 2025).

This quotation emphasizes on the financial strain that declining consumer purchasing
power places on supermarkets, particularly small and medium-sized enterprises (SMEs). As
customers cut back on spending or switch to more affordable outlets, supermarkets experience a
sharp decline in sales and revenue. This drop in foot traffic and average purchase size directly
impacts profitability and operational sustainability. For SMEs lacking the scale to cushion such
shocks, this situation becomes even more precarious, limiting their ability to restock shelves or
adjust pricing competitively. These findings are in line with the Cost-Push Inflation Theory,
which states that rising production and input costs lead to higher consumer prices as businesses
strive to preserve profit margins. When costs rise due to factors like transportation, wages, or raw
materials, SMEs often find it difficult to shield customers from these effects, resulting in price
hikes at the retail level. This implies that without targeted support or strategic cost management,
supermarkets may continue to struggle with pricing dilemmas that undermine customer loyalty
and revenue consistency. Governmental stabilization of input markets or tax reliefs could be
instrumental in preserving affordability for consumers.

The results in table 4 reveals that 41.3% of respondents agreed and 30.2% strongly
agreed that rising costs due to PPI negatively affect financial performance. Only a minority of
6.9% disagreed and 2.6% strongly disagreed. The mean score of 3.89 and standard deviation of
0.99 reflect a strong agreement with this sentiment. This indicates that supermarket owners
widely perceive cost escalation as a direct threat to their financial outcomes. The close clustering
 16

of responses around the mean demonstrates consistent acknowledgment of this issue among
respondents. These quantitative results align with key informant reports. As one owner noted,

“The decline in consumer spending has forced us to reduce stock levels, especially for
non-essential items. Many customers now prioritize staples, and our revenue has dropped
by nearly 20% compared to last year. This directly affects our ability to negotiate better
prices with suppliers, creating a cycle of higher costs and lower sales." (Interview with
Key Informant 1, July 1, 2025).

A supermarket manager added,

"When purchasing power falls, supermarkets face a double burden: unsold inventory and
cash flow shortages. We’ve had to delay payments to suppliers, which strains
relationships and risks stockouts. Financial performance deteriorates because margins
shrink even as operational costs remain fixed." (Interview with Key Informant 2, July 2,
2025).

These findings directly support the Cost-Push Inflation Theory, which argues that
increases in the cost of production lead to inflationary pressures that erode profit margins. SMEs,
particularly supermarkets, are more vulnerable to this phenomenon because they often operate
with tight profit margins and limited ability to hedge against supply-side shocks. This is
reinforced by Thompson and Ramirez (2020), who observed that rising PPI significantly
undermined SME profitability by increasing input costs, which businesses struggled to offset.
This implies that rising PPI poses a serious threat to the financial health of supermarkets in
Moshi Municipality.

4.3 Hypothesis Testing

To empirically validate the relationship between the Producer Price Index

(PPI) movements and the financial performance of Small and Medium Supermarkets in Moshi
Municipality, a Linear Regression model was employed. The hypothesis was tested at
a significance level of 0.05, the conventional threshold for social science research. The null
hypothesis (H₀) stated that there is no significant effect of PPI increases on the financial
performance of Small and Medium Supermarkets, while the alternative hypothesis (H₁) posited a
negative relationship.
 17

The analysis examined the relationship between the predictors for Producer Price Index
(cost pressure from rising input prices and consumer demand constraints) and the dependent
variable (financial performance of small and medium supermarkets) using a multiple regression
model. The model assumed that there is a linear relationship between the predictors and the
dependent variable. This assumption was fulfilled by including the predictors in the model and
assuming a linear relationship between them and financial performance.

4.4 Diagnostic Tests

This study investigates the diagnostic tests used to evaluate the effects of the Producer
Price Index on the financial performance of small and medium supermarkets in Moshi
Municipality, employing a range of statistical tools to ensure the validity of the regression model.
Such tests include normality tests, the model summary, the ANOVA (Analysis of Variance), and
lastly, the coefficients table were performed. These diagnostic tests were conducted to verify the
assumptions of linear regression and assess the robustness of the model in examining the
relationship between PPI fluctuations and SME financial outcomes.

4.5 Normality Tests

To analyze the effects of Producer Price Index (PPI) movements on the financial
performance of small and medium supermarkets, normality tests were conducted to assess
whether the regression model's residuals satisfied the assumption of normal distribution, a
fundamental requirement for valid parametric statistical analysis. The results of the Kolmogorov-
Smirnov and Shapiro-Wilk tests are presented in table 5, providing critical insights into the data
distribution and the reliability of subsequent regression findings regarding PPI's effects on SME
financial outcomes.

Table 5. Tests of Normality

Kolmogorov-Smirnova Shapiro-Wilk

Statistic df Sig. Statistic df Sig.

Standardized Residual .068 189 .032 .973 189 .001

a. Lilliefors Significance Correction

 18

The results in table 5 show that the Kolmogorov-Smirnov (K-S) test yielded a statistic of
0.068 with a significance value (p-value) of 0.032, while the Shapiro-Wilk (S-W) test produced a
statistic of 0.973 with a p-value of 0.001. Since both p-values are below the 0.05 threshold, the
results indicate that the residuals deviate significantly from a normal distribution. For additional
validation, a Normal Q-Q Plot should be examined to confirm whether the data points follow a
diagonal line. These findings suggest that the normality assumption is not fully satisfied, which
may require further diagnostic measures or data transformations to ensure the robustness of the
regression analysis on the effects of PPI increases on SME financial performance.

4.6 Model Summary.

The study employed regression analysis to quantify the effect of Producer Price Index
fluctuations on SME financial performance in Moshi's supermarket sector. As presented in Table
6, the model summary reveals critical indicators including the multiple correlation coefficient
(R), coefficient of determination (R²), adjusted R², and standard error - collectively evaluating
how effectively PPI-related cost pressures and demand constraints explain variations in
supermarket financial outcomes. These metrics provide empirical evidence of the model's
capacity to capture the relationship between input price inflation and SME operational
performance.

Table 6. Model summary.

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .643a .414 .407 .52462

a. Predictors: (Constant), Demand Constraint, PPI Cost Pressure

b. Dependent Variable: Financial Performance of Small and Medium Supermarkets

Table 6 shows that PPI Cost Pressure and Demand Constraint explain about 41.4% of the
variation in financial performance among small and medium supermarkets (R² = 0.414), with a
moderate prediction accuracy (standard error = 0.52462). While this suggests the model has
reasonable explanatory power, it does not confirm a statistically significant relationship on its
own. To determine if the predictors truly affect financial performance, further analysis such as
 19

checking p-values in the ANOVA or coefficients tables is needed before rejecting the null
hypothesis.

4.7 Analysis of Variance (ANOVA) Results

The study employed Analysis of Variance (ANOVA) to statistically verify the collective
effect of Producer Price Index fluctuations on supermarket financial performance. As presented
in table 7, this test examines whether the combined effect of PPI cost pressures and consumer
demand constraints significantly explains variations in SME financial outcomes. The F-statistic
and its corresponding p-value serve as critical benchmarks for assessing the regression model's
overall validity and the predictors' joint significance in influencing financial performance
metrics.

Table 7. ANOVA.

Model Sum of Squares df Mean Square F Sig.

1 Regression 36.112 2 18.056 65.605 .000b
Residual 51.192 186 .275
Total 87.304 188
a. Dependent Variable: Financial Performance of Small and Medium Supermarkets
b. Predictors: (Constant), Demand Constraint, PPI Cost Pressure

Table 7 presents the ANOVA results for the regression model analyzing the effects
Producer Price Index on Financial Performance of Small and Medium Supermarkets. The
analysis reveals that these predictors collectively explain a statistically significant portion of
variance in financial outcomes. With an F-value of 65.605 and a highly significant p-value
(.000), which is well below the conventional .05 threshold, the results demonstrate strong
predictive power. This indicates that rising producer prices and consumer demand constraints
significantly affect the financial performance of supermarkets. Therefore, we reject the null
hypothesis, confirming that thee increase in Producer Price Index have a meaningful relationship
with SME financial performance in Moshi's supermarket sector.

4.8 Regression Coefficients Analysis

To evaluate the distinct effect of Producer Price Index (PPI) increase on SME financial
performance in Moshi's supermarket sector, a coefficients analysis was performed to determine
 20

the direction, strength, and statistical significance of each predictor's effect. This analysis
presents both unstandardized (B) and standardized (Beta) coefficients, along with their
corresponding p-values, illustrating how variations in PPI-related cost pressures and demand
constraints influence the financial outcomes of small and medium supermarkets, as detailed in
table 7.

Table 8. Coefficients.

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta T Sig.
1(Constant) 2.024 .224 9.041 .000
PPI Cost Pressure -.030 .045 -.038 -.663 .508
Demand Constraint .530 .046 .648 11.397 .000
a. Dependent Variable: Financial Performance of Small and Medium Supermarkets

Table 8 presents the regression coefficients analyzing the effects of PPI Cost Pressure
and Demand Constraint on small and medium supermarkets financial performance. The results
reveal that Demand Constraint has a statistically significant positive influence (Beta = 0.648, p
< .001), indicating that tighter consumer demand substantially improves financial outcomes. In
contrast, PPI Cost Pressure shows no significant effect (Beta = -0.038, p = .508), suggesting
rising input costs alone don't meaningfully impact performance when demand factors are
considered. The constant (2.024, p < .001) confirms baseline financial performance remains
positive even when these predictors are zero. These findings reveal that while consumer demand
constraints powerfully predict financial outcomes, PPI cost pressures show no meaningful
independent effect in this model. Therefore, we reject the null hypothesis for Demand Constraint
but fail to reject it for PPI Cost Pressure, demonstrating that consumer purchasing power rather
than input costs alone drives supermarket performance in Moshi Municipality.

4.9. Secondary Data

The secondary data show that the analysis of Moshi supermarkets from 2020 to 2024
reveals a critical paradox: while revenues grew consistently (6.7% annually), profits declined by
an average of 3.2% per year, with profit margins collapsing from 18.2% to 13.1%. This
divergence strongly suggests that Producer Price Index (PPI) movements reflecting rising input
costs outpaced supermarkets' ability to pass these costs to consumers, compressing margins. The
 21

liquidity proxy (profit-to-revenue ratios) shows a near-perfect negative correlation with time (r =
-0.98, p < 0.01), indicating that SMEs' financial resilience eroded as PPI-related cost pressures
mounted. Notably, 17 of 20 supermarkets experienced statistically significant profit declines (p <
0.05), emphasizing on the systemic nature of the challenge. These findings align with cost-push
inflation theory, demonstrating how PPI increases undermine SME profitability even in growing
markets, as seen in Moshi’s r evenue-positive but profit-negative trajectory.

Table 8. Profit-to-Revenue Ratios (Liquidity Proxy)

Year Average Ratio YoY Change

2020 18.2% -

2021 16.8% -1.4pp

2022 15.4% -1.4pp

2023 14.1% -1.3pp

2024 13.1% -1.0pp

The widening performance gap between top (SM-07 with 26.5% revenue growth) and
bottom performers (SM-06 with 18.3% profit decline) highlights the uneven capacity of SMEs to
adapt to PPI shocks. The data implies that supermarkets would need 22% higher revenue in 2024
than in 2020 to maintain the same absolute profit a stark indicator of PPI’s financial toll. The
consistent drop in working capital efficiency evidenced by declining liquidity ratios further
worsens operational vulnerabilities. These trends threaten supermarkets sustainability in Moshi
Municipality, particularly for smaller supermarkets struggling to absorb PPI-driven cost
pressures.

5. Conclusions and Recommendations

This study examined how movements in the Producer Price Index (PPI) affect the
financial performance of small and medium supermarkets in Moshi Municipality. While
regression analysis showed that PPI cost pressures were not statistically significant (Beta = -
0.038, p = 0.508), demand constraints were found to be the strongest predictor of financial
performance (Beta = 0.648, p < 0.001). Nonetheless, descriptive statistics and qualitative insights
 22

revealed that rising PPI indirectly strained supermarket operations by increasing costs, reducing
product variety, and forcing operational cutbacks. Profit margins declined steadily from 2020 to
2024, despite revenue growth, indicating that supermarkets struggled to absorb inflationary
shocks.

Supermarkets responded to these pressures with adaptive strategies such as innovation, quality
improvement, and strategic sourcing. A majority of respondents confirmed that PPI movements
encouraged operational changes, including flash sales, reduced stock levels, and supplier
renegotiations. These findings support the Cost-Push Inflation Theory, which explains how
rising input costs reshape business strategies even when their direct statistical impact is limited.
Overall, the study shows the need for resilience-building measures and targeted policy support to
help SMEs maintain financial stability in inflationary environments.

Declaration

The author declares the use of Artificial Intelligence (AI) in writing this paper. In particular, the
author used ChatGPT (OpenAI) in assisting with literature review, summarizing key points,
paraphrasing ideas, and refining the clarity of expressions.

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