Inflationary Pressures and SME Profitability: An Analysis of Cost-Pass - Through Mechanisms

Inflation has become a critical macroeconomic challenge affecting business sustainability, particularly for Small and Medium Enterprises (SMEs). This study examines the impact of inflationary pressures on SME profitability, with a specific focus on cost pass-through mechanisms. Inflation increases input costs such as raw materials , labour , transportation, and energy, thereby exerting pressure on firms’ profit margins. While firms may attempt to transfer these increased costs to consumers through price adjustments, SMEs often face constraints due to limited market power and high price sensitivity among customers. The study explores the extent to which SMEs can pass on rising costs and how incomplete cost pass-through affects their profitability. It also analyses sectoral differences and the role of competitive market conditions in shaping pricing strategies. The research highlights that SMEs frequently absorb a portion of increased costs, leading to reduced margins and financial vulnerability. By focusing on emerging economies, particularly India, the study contributes to understanding the challenges faced by SMEs in inflationary environments. The findings provide insights for policymakers and business practitioners to design strategies that enhance SME resilience, improve pricing flexibility, and support sustainable growth under inflationary conditions.