As a Catholic, this is simply not a rule that anyone is even aware of in US/Canadian/many South American Catholic Churches. I would bet that even the older "church ladies" in my church would be unaware of the rule. Heck, the priest may not be aware.
Modesty, yes - but a skirt an inch above the knee and a sleeveless blouse are pretty modest by standards in Europe as well as the US. Think of many of Michelle Obama's iconic dresses. Not inappropriate in the least, but not in accordance with the stricter rules.
SO...if there is a rule posted, FOLLOW IT. But this rule is not posted or mentioned in much of the south of Spain. In those cases dress respectfully but don't worry about a rule that doesn't apply there.
Different diocese and places have the leeway to enforce things differently. For example, in one diocese in the US we couldn't have an outdoor wedding because of church rules. In another we could - Catholicism is not as monolithic as it sounds and the local authorities do differ.
The argument that I should follow this rule in all churches means I would need to follow it at home which is absurd. Therefore I follow it when it is posted (not just enforced - small churches may post it but not have staff to enforce - follow it anyway). When it is not posted and no one seems aware, I behave respectfully and wear my normal clothes. Just like at church at home. Granted, I'm not running around in daisy dukes and midriff tops - if that's your style then perhaps bring some scarves!