20 October 2026: The Bank of England outlines a rigid-central inflation measure for UK price pressures

The Bank of England has introduced a new inflation measure, reweighting CPI components using microdata and sector centrality to target price pressures relevant for monetary policy. The August 2026 inflation reading using this new methodology 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.

This measure has not yet shown significant pick-ups after the recent rise in energy prices, suggesting broader underlying pressures may be more contained than headline movements alone suggest.

In the assessment, 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 BoE 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. Earlier reports noted that resilient activity was supported by policy actions aimed at stabilising markets. In contrast, officials continue to monitor inflation and market volatility as energy costs stay elevated.

Higher mortgage rates are putting greater pressure on asking prices in some of Britain's more affordable areas, according to Rightmove. The average price of a newly listed home rose 1% this month, or £3,575, to £371,371, but remained 0.1% lower than a year earlier.

Rightmove says the national figure masks growing affordability pressure in lower- priced areas as borrowing costs have risen sharply. New sellers in four of the five lowest- priced parts of Britain set lower asking prices this month. Prices fell by 2% in the North East, 1.9% in Scotland, 0.6% in the North West and 0.3% in Wales. Yorkshire and the Humber was the exception, with asking prices up 0.3%.

London moved in the opposite direction, with asking prices up 2. 5% this month after a cumulative 6% fall across July and August.

However, prices in the capital remained 1. 7% lower than a year ago, and Rightmove says wider indicators do not point to a broader recovery. Across Britain, agreed sales were 8% lower than a year ago, broadly in line with the year-to-date trend. New buyer enquiries fell 9% year on year, while new listings rose 3%. The total number of homes available for sale remained at its highest level for this time of year since 2014.

Rightmove mortgage expert Matt Smith says: “It' s been a difficult few weeks for home buyers who have been watching mortgage rates rise quickly, particularly for those who had worked out what they could afford based on lower rates earlier in the year. “Some buyers will understandably be reassessing their budget and what they can afford or feel comfortable borrowing. “The fact that sales activity hasn't fallen back further so far shows that many people still want to get on with their move.”

North London estate agent and former RICS residential chairman Jeremy Leaf says: “The double whammy of expected mortgage rate rises and Budget uncertainty is compromising confidence and activity. “In such a sensitive market, only sellers who recognise the importance of competitive asking prices are standing out from the crowd and succeeding in finding a buyer.” “Higher mortgage rates, a pending Budget and the prospect of further taxes on banks are creating further uncertainty, lower sales and keeping a lid on values.

“Buyers are very aware of what they can afford and, in turn, are making lower bids.”

The UK faces an "economic catastrophe and moral failure" as nearly 1 million young people remain outside education, employment or training, Prime Minister Andy Burnham warned on Monday. Writing in The Times, Burnham called on the government to "invest in the success of our young people" rather than "pay for failure through the benefits system".

"Benefits will become the backstop, not the starting point," he wrote in an opinion article published yesterday. He also said a long-awaited review of young people and work would be published next month, pledging to take its recommendations "seriously".

According to the latest data from the Office for National Statistics, nearly 1 million people aged 16 to 24 in the UK are not in education, employment or training. The figures show that around 39% are unemployed, while the remaining 61% are economically inactive, meaning they are not seeking work.

Burnham attributed the crisis to several factors, including two years of COVID-19 lockdowns, social media, an education system focused on university education, limited job opportunities and failures by previous governments. He argues that social media erodes young people's "confidence and sense of belonging." "This is an economic catastrophe and a moral failure. And it must change," he wrote.

Burnham criticised the current welfare system, arguing that it often provides financial support without offering young people a route into employment.

"Today, the welfare system provides an assessment, a payment and, after that, goodbye," he wrote. "Too often there is no support, no offer of skills and no opportunity to get a job."

He said the government's approach should shift towards identifying young people's ambitions and providing the assistance needed to achieve them, rather than beginning with an assessment of benefit entitlement.

"The safety net will always be there for those who cannot work. But if someone can work with the right help, the government has a duty to do everything in its power to make that happen," Burnham said.

Few would disagree with the Prime Minister’s sentiments. Still, he must pull the necessary levers, so he will need to galvanise his Cabinet colleagues to develop meaningful proposals to ensure this issue does not continue.

Yesterday, the British pound was broadly steady to slightly weaker in major FX trading, with performance diverging across counterpart currencies. Against the US dollar, Sterling edged lower, with GBP/USD closing around 1.3304, down about 0.02% on the day. Meanwhile, it weakened modestly against the Euro. The ECB reference rate moved from EUR/GBP 0.84385 on Friday to 0.84205 yesterday, implying a small decline in sterling versus the Euro.

Versus a wider basket, moves were generally limited, reflecting a lack of major UK-specific catalysts and a market focus on interest-rate expectations for both the Bank of England and the Federal Reserve.

Hawkish Federal Reserve officials are becoming more influential in the monetary policy debate. Goolsbee, Kashkari, and Hammack prioritise fighting inflation, even if that means keeping interest rates higher for longer or raising them further.

Markets are increasingly concerned that the Fed may tighten further or keep policy restrictive longer than previously expected. A rate hike next week had been considered unlikely, but August’s CPI rise put one front and centre in the FOMC’s deliberations.

Chicago Fed President Austan Goolsbee said price pressures linked to data-centre construction are spreading into the broader economy.

“This is starting to feel like aggregate overheating, with AI data-centre cost increases jumping out of their lane and prices rising in areas beyond data-centre components and the industries directly adjacent to data centres,” he said.

Fed Chair Kevin Warsh has moved towards the same view. At International Monetary Fund meetings in Thailand last week, he called AI investment a shock to both prices and demand. He also said he expects wealth and productivity gains from the technology over time.

“If you’re a Central Banker, you’re in the business of trying to ensure stable prices and full employment; you’ve got to recognise this as a shock,” Warsh said.

AI firms, particularly the largest hyperscalers, have been spending aggressively with little regard for borrowing costs. As a result, economists expect the strain to fall on small businesses, credit-dependent households and companies outside the AI supply chain.

Cleveland Fed President Beth Hammack has acknowledged the need to rein in inflation, but also recognised the chilling effect higher rates would have on smaller stock-market gains and slower activity outside AI.

“I like growth; I’m not trying to stop growth. I’m just trying to pull it back a little bit so that it’s moving at a pace that doesn’t put too much pricing pressure out there,” she told Reuters.

Warsh said he doesn't expect the Fed to “need to do harm to the labour markets” to bring inflation back to 2%, though some former officials want more detail.

Not everyone expects the pressure to persist. In a recent note, Goldman Sachs economists estimate that AI is adding about 45 basis points to core personal consumption expenditure inflation, with roughly half due to a genuine price effect and the rest to measurement issues.

They expect the effect to peak at 50 basis points by year-end and fall to 10 basis points by the end of 2027, as memory chip and computer prices rise more slowly.

“In short, the impact of AI demand on inflation is meaningful but moderate, still comes in large part from mismeasurement, and is likely near its peak,” they wrote.

After being overlooked for the Fed Chair, Kevin Hassett has become one of Donald Trump’s most vocal supporters.

He said yesterday that rising wages were driving additional consumer demand, a development he believes the Federal Reserve needs to monitor. He maintained that the U.S. economy was “in a boom.”

Speaking on CNBC's Squawk Box, Hassett said, “People are really euphoric about how well the economy is doing, and they're spending more. And of course, that's the kind of thing the Fed needs to pay attention to.”

The NEC director attributed an estimated $2,000 increase in inflation-adjusted average wages since President Donald Trump took office to a third-party group, while acknowledging that wages had lagged inflation in recent months.

Official BLS data showed real average hourly earnings declined 0.5% in September and 0.7% year over year. The economy added 29,000 jobs in September, while unemployment stood at 4.2%.

“We’re very bullish still on the outlook for the economy,” said Hassett, adding that people are euphoric about how well the economy is doing and are spending more. “That’s the kind of thing the Fed needs to pay attention to”.

The dollar lost ground against a basket of major currencies, signalling broad-based weakness unlikely to persist. Markets seemed to look past recent hawkish Fed rhetoric, focusing instead on lower expectations for an immediate rate hike and profit-taking after the dollar's earlier rally. Lower Treasury yields and improved risk appetite weighed on the dollar as investors shifted into higher-yielding or risk-sensitive currencies.

For decades, Germany's reputation was built on manufacturing premium, high-quality goods for export, generating substantial revenue. The industrial sector remains a major contributor, accounting for about 20% of the country's total value added, far exceeding that of other major European Union economies such as France, Spain, and Italy. This sector is also closely linked to a vast network of related industries, including professional and business services.

Germany's industrial prowess lies in its specialisation in intricate yet vital components, the "parts within parts" indispensable to creating final products. This is like a complex "Matryoshka" doll. For instance, chemicals produced in Germany are integral to automotive protective coatings, road and bicycle lane markings, architectural paints, and even the microchips powering mobile phones.

In essence, the German chemical industry permeates every facet of modern life.

The economy now significantly trails nations once considered direct competitors and economic counterparts. A comparison of Germany's Gross Domestic Product dynamics over the last twenty years with the weighted averages of South Korea, Japan, Finland, Canada, and Sweden reveals a staggering gap of between 6% and 7%. For a nation of Germany's scale, this difference is immense. The longer this weakness endures, the clearer it becomes that Germany faces not a mere cyclical downturn, but a deep, long-term erosion of its fundamental economic potential.

Many experts agree that Germany is approaching a critical juncture. Inaction risks turning Germany, and by extension the rest of Europe, into little more than a museum, a relic of past industrial glories. The consequences of this industrial decline are already palpable, affecting jobs and the well-being of entire industrial regions. The nation faces a stark choice: either implement decisive reforms to revitalise its industrial base or risk obsolescence on the global stage.

France, the Eurozone’s second-largest economy, saw bond yields rise further yesterday following violent street demonstrations over the weekend.

Its 10-year government bond yield hovered around 4.9% on Monday, near its highest level in more than two decades, as investors demanded a higher premium for holding French debt. Protesters are calling for action on the rising cost of living and deteriorating public services, including education.

The unrest adds pressure on the government as it seeks to pass its 2027 budget through a deeply divided National Assembly, the lower house of France’s parliament.

The immediate challenge is to pass a credible budget that reassures investors ahead of the spring 2027 Presidential election. But restoring confidence will also depend on whether the next administration can commit to improving public finances over several years.

Modelling the impact of bond turmoil in France, with some contagion to other high-debt eurozone countries, Oxford Economics found that Italy would be particularly vulnerable because it combines slow growth, high debt, and investment sensitive to tighter financial conditions.

A key gauge of market concerns is the gap between a country’s 10-year government bond yield and Germany’s. The current spread, the extra return investors demand for holding French debt rather than German debt, has risen to around 145 basis points. This is still slightly below the peak reached earlier this month, the highest since the 2011–2012 debt crisis.

Oxford Economics sets out a baseline and two adverse scenarios. Its baseline assumes that France’s spread stays below 200bps ahead of the April 2027 election and narrows afterwards. It still views a French debt crisis as unlikely but potentially damaging, rather than as its central forecast.

Passing the 2027 budget is a vital cog in any recovery forecast.

France faces the risk of a vicious circle in which higher borrowing costs force further spending cuts or tax rises, weakening growth and making its debt harder to control.

France has been heading towards a debt crisis for years, and that moment is getting closer.

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