The cost-of-living crisis has been dominating the policy debate across the UK, although perhaps not as singly as some political figures may hope.

There is no doubt that the shock to real incomes that we are going to see this year is historically unprecedented, at least in the recent past, with the Office for Budget Responsibility predicting the biggest single-year fall in living standards since the Second World War.

The rise in the consumer energy price cap happened in April, with an increase of 54 per cent in the unit price. This has fed through to consumer inflation, with a further price rise to come in October. Other cost pressures resulting from the war in Ukraine and post-pandemic supply chain disruption are adding significant inflation to food and other consumer products.

Of course, the business base has had no such protection from price rises on energy, and the price of many of the inputs that businesses use has seen double-digit inflation for many months. The latest figures from the ONS shows that input prices grew by 19% on the year to April, compared to consumer inflation of 9%.

Digging into this data shows the inputs that are causing the largest increases in input prices. There are those that we would expect, like petrol, having increased by 85% over the year. But other products, such as wood products (+25%), chemicals (+28%), metals (+35%), which are key inputs into manufacturing and construction, are also showing large increases and squeezing margins in certain industries.

While the evidence suggests businesses seem to be trying to limit the price rises that they pass on to customers, something will have to give. This is especially the case given the increases in business costs that have come in in April, such as the increase in employer National Insurance contributions.

Our latest survey with businesses, carried out last month, suggests that 88% of businesses expect to increase their prices over the next 12 months. It is even higher than this in the accommodation and food services and construction sector.

This is to be expected given the inflationary situation that we are in. More concerning from the point of view of the overall economy is that around a third of businesses expect to reduce their operations due to high energy and fuel prices.

There are also significant supply issues which are likely to push up business costs still further. Over half of businesses we talked to were having issues sourcing the goods and services they use, with lack of domestic supply, high prices, and freight availability and delays being cited as the most common issues.

The biggest challenge that businesses are dealing with right now is the supply of labour. We are now in the situation in the UK where there are more vacancies than unemployed people in the UK. Given the likely skills and geographic mismatch between those who are available versus available jobs, we really are in an era of at least full employment.

Vacancies rates across all sectors are at record highs since the time series began in 2001: with 4.3% of all jobs vacant. This is highest in the accommodation and food sector (8%), and information and communication (6%). The highest numbers of vacancies are in the health and social care sector, with 212,000 jobs currently vacant across the UK.

This situation is likely to lead to a significant increase in wages across the economy as employers compete for a smaller pool of suitably skilled staff. We are likely to see significant pressure across the economy, including in sectors with collective bargaining, to increase wages in line with the increases in costs of living.

We’ve seen growth in total pay (including bonuses) of 7% in the first quarter of the year – although there is a clear dichotomy between sectors, with 8.2% in the private sector compared to 1.6% for the public sector. We can expect, as we have already seen, a number of months of pressure on all levels of Government to increase public sector pay in line with inflation. This is likely to be resisted given the impacts it will have on the public purse.

The issues with staff availability have led to some sectors restricting opening hours or days. This is happening both in city centres during the week where footfall is still significantly below pre-pandemic levels, and in more rural areas where staff availability issues are particularly acute.

The extra help announced last week by the Chancellor will be welcomed by consumers, and it may be that this softens some of the impact on the wider economy of the cost of living crisis.

However, there is little help for businesses facing these unprecedented price rises, which will mean that they continue to filter through to prices faced by consumers over the course of 2022.

This is a pretty downbeat, although realistic, assessment of the economy. Right now, it is hard to be optimistic about the prospects for the Scottish and UK economies over the next few months

The recent forecasts for the UK economy produced by the Bank of England were stark: predicting a contraction in the economy over the course of 2023.

Today we will get new forecasts for the Scottish Economy from the Scottish Fiscal Commission, which are likely to be similarly downbeat.

We will also see how the Scottish Government plan to spend their budget over the next three years in their long-awaited spending review.

Businesses in Scotland will no doubt be looking with interest at the measures proposed to support the economy through this difficult time.

Professor Mairi Spowage is the director of the Fraser of Allander Institute, an economic research institute at the University of Strathclyde