THE “debilitating” effect of inflation will mean prices stay permanently high, with Scottish households expected to see on average a drop of around £800 in disposable income by the end of this year, economic experts have warned.

While inflation is expected to fall sharply over the short-term, forecaster say prices which have soared as a result will remain at their current levels.

A report last week published by the Scottish Fiscal Commission (SFC) warns that living standards will take until 2026-27 to recover to levels seen in 2021-22.

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Chair Graeme Roy said: “We can be pretty confident from a purely arithmetic view that inflation will fall sharply over the next few months – that is largely because obviously the way we calculate inflation is essentially changing prices from a year earlier.

“So we have seen this huge spike in energy prices, spike in food prices, so once you move out of that year, then inflation will fall because it is not increasing.

“That is the important thing to remember about inflation – it is measured in rate of growth, so prices are just not increasing faster. That doesn’t mean prices are going down.

“Inflation if it goes up and doesn’t fall back by the exact same negatively, then the price level has permanently gone up and that is the debilitating effect of inflation here.

“So your coffee that did cost £3 now costs £3.50 – it might not go up again this coming year, but it is still £3.50, it is not going to go back to £3. That is the debilitating effect of inflation and erosion on living standards.”

He added: “One of the things we have seen recently is energy prices have fallen back really quite sharply from where they were last year, but food prices haven’t and there is still stickiness in food prices.

“That is one of the reasons why inflation has not come down as quickly as it should do.”

Roy said the total drop in average living standards – measured by average household disposable income – will be about 4%, which equates to around £800 on average for families in Scotland.

He said: “It will take time for these to recover again, so even once the living standards and incomes start to increase again, as earnings start to increase, it will take time for those incomes to make up the lost ground as a result of the high inflation we have seen.”

The SFC report came as Scottish Government published its Medium Term Financial Strategy on Thursday.

Roy said the “level shift” in inflation has “knock on implications, not just for the economy but also for government spending and the spending power of government”.

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