Bank of England outlines rigid-central inflation measure for UK price pressures

Traders Union
All News
Regulators
Bank outlines rigid inflation measure

Highlights

The Bank of England introduced the rigidity-centrality-weighted (RC) inflation measure, reweighting CPI components using microdata and sector centrality to target price pressures relevant for monetary policy.
The August 2026 RC inflation reading is 3.3%, a significant decline from post-Covid highs and not materially affected by recent energy price increases.
RC inflation tracks aggregate real marginal costs more closely than headline CPI, offering a more precise signal for Bank Rate decisions and real economic overheating.

Method links sector pricing to policy signals

As reported by the Bank of England, the proposed rigidity-centrality-weighted, or RC, inflation measure is designed to distinguish between price shocks that monetary policymakers should look through and inflationary pressures that warrant a response through Bank Rate.

The analysis argues that headline inflation can combine very different forces, including temporary relative price shifts such as energy supply disruptions and broader demand-driven pressures tied to domestic wages, capacity limits or spillovers across supply chains. Because monetary policy works through a single main instrument and cannot stabilise prices in every sector at once, the Bank says it is often optimal to allow some relative price adjustments to take place rather than forcing a wider contraction in activity.

The framework builds on Rubbo's 2023 multi-sector New Keynesian model, which suggests policymakers should pay closer attention to inflation in sectors whose prices are typically more rigid and in sectors that sit at the centre of the production network. In those areas, price increases are seen as a stronger signal of aggregate marginal cost pressures and economy-wide overheating, while distortions can spread more broadly through the rest of the economy.

To build the UK measure, the Bank reweights consumer price index components at the COICOP 4 level, covering 85 subcomponents. It uses ONS microdata cited from Davies 2021 to estimate how frequently prices change for individual items over the 2000-19 pre-Covid period, then combines those rigidity estimates with centrality measures derived from the 2023 ONS input-output tables and Domar weights mapped from CPA sectors to COICOP categories.

August reading points to easing broad-based pressure

The Bank says the latest RC inflation reading for August 2026 stands at 3.3%, down markedly from post-Covid highs. It adds that the measure has so far not shown significant pick-ups after the recent rise in energy prices, a sign that broader underlying pressures may be more contained than headline movements alone suggest.

In the Bank's assessment, RC inflation tracks aggregate real marginal costs more closely than headline CPI and therefore offers a better guide to the economy's degree of overheating or slack. That makes it potentially useful for a flexible inflation-targeting central bank seeking to balance inflation stabilisation with support for real activity.

The work also contrasts the new method with a more traditional inflation-targeting approach that focuses mainly on timing, looking through shocks expected to unwind before policy acts and concentrating on second-round effects. By contrast, the rigid-central framework emphasises where inflation is most economically costly, especially in sectors where firms struggle to reprice quickly and where cost distortions can propagate across the wider UK economy.

Bank of England Deputy Governor Sarah Breeden said at the IMF meetings in Bangkok that the UK economy has absorbed the energy price shock better than initially feared. Our earlier coverage noted that resilient activity was supported by policy actions aimed at stabilising markets, while inflation and market volatility remain key risks that officials continue to monitor as energy costs stay elevated.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.