Scottish Economic Bulletin - August 2026

Inflation and Cost of Living

The inflation rate fell in June, however is expected to rise in July reflecting the rise in household energy prices.

Inflation

• UK inflation fell to 2.6% in June, down from 2.8% in May and April and is at its lowest rate since March 2025. Key drivers of the fall in inflation rate over the month were in transport, in which inflation fell from 6.8% to 5.7%, and food and non-alcoholic beverages prices which fell from 2.2% to 1.7%.^[3]
• Within transport, motor fuel prices fell in June with petrol and diesel prices falling together (-1.3% and -5.7% respectively) for the first time since February prior to the Middle East conflict. The fall in petrol and diesel prices in June partly reflects that oil prices averaged c. $85 per barrel over the month, down from c. $107 per barrel May, due to the ceasefire in the Middle East.
• That said, annual petrol price inflation remained elevated at 17.7% in June with annual inflation of diesel at 27.4%. Furthermore, road fuel prices have increased again during July, with petrol prices now at their highest since the conflict began.^[4]

• Prices for household liquid fuels such as heating oil continued to moderate in June, albeit there are indications that heating oil prices have picked up slightly in July. Furthermore, the 13% rise in the household Energy Price Cap (EPC) for the third quarter will also start to be reflected in July’s inflation data, reflecting the increase in wholesale energy prices between March and May.^[5] The EPC will next change in October and will partly depend on how energy prices evolve in the coming months. The escalation of military action again in July has generated further price volatility, with renewed upward pressure on oil and gas prices.

Monetary and Credit Conditions

• Inflation is expected to rise in the second half of 2026 as the rise in energy prices and business costs feed through to consumer prices. The Bank of England project inflation to rise from its current rate of 2.6% to 2.9% in Q3 and peak at 3.2% in Q4.^[6]
• The Bank’s Monetary Policy Committee (MPC) held the Bank Rate unchanged for a fifth consecutive time in July at 3.75%.^[7] The Committee judged that while higher energy prices were expected to increase inflation in the second half of this year, there is little evidence of second round inflation effects so far, and the current interest rate alongside underlying demand conditions are sufficiently offsetting inflationary risks at this point.

• Increased expectations of higher inflationary pressures and tighter monetary conditions have fed through to higher borrowing costs faced by households since February, and while borrowing costs have fallen back slightly over May and June, they remain higher than their pre-conflict rates.
• For example, interest rates on two-year 75% and 90% loan‑to‑value (LTV) mortgages eased further in June to 4.81% and 5.19% respectively, down from 4.92% and 5.32% in May. However, rates remain elevated compared with pre‑conflict levels in February, when they stood at 3.97% and 4.34%.^[8]

Consumer Sentiment

• The Scottish Consumer Sentiment Indicator reflects how people feel the economy is performing, how secure they feel about their household finances and how relaxed they feel about spending money.

• The Scottish Consumer Sentiment Indicator weakened in the second quarter of the year from -8.6 in Q1 2026 to -12.7 in Q2 2026, its lowest quarterly level since Q1 2023 and likely reflecting the start of the conflict in the Middle East at the end of February, the resulting energy price shock and the inflationary pressures this has generated for household finances.
• The monthly data shows that consumer sentiment reached its recent low point in April (-16.7) before strengthening by 3.7 points in May to -13.0 and by 4.8 points in June to -8.2.^[9]

• The strengthening in June was broad based across the current and expectation sub-indicators, however all indicators remain below their pre-conflict levels in February, particularly the household spending indicator (down 9.3 points) and the expected household finances indicator (down 3.3 points) suggesting that households remain most concerned about their household financial security and remain cautious about spending money.