The Bank of England Quarterly Inflation Report points towards an interest rate rise in the autumn.
After five increases in the last year, as inflation headed over three per cent, one more rise would see the base rate hit six per cent, the highest level since January 2001.
The inflation report predicts that inflation will fall back to two per cent by 2009 if interest rates "move in line with market expectations", which are for a rise.
Bank of England governor Mervyn King said: "Inflation has fallen back quite sharply from 3.1 per cent in March to 2.4 per cent in June as household gas and electricity prices started to decline.
"It's likely to fall back further over the next few months but could remain volatile in the short run, reflecting the unpredictability of energy prices and the British weather."
He went on to point towards a number of business surveys showing an upbeat economy, but warned that while household spending has remained firm since the increase in the cost of borrowing, there were tentative signs that it would now slow.
He added that it was impossible to say how large and persistent the tightening of credit will be following the recent falls in equity prices and widening credit spreads.
Further factors that muddy the waters of the future of inflation include the current high level of sterling, making imports cheaper, and the possible effects of the current outbreak of foot-and-mouth and last month's flooding. Mr King said that it was early to judge the full consequences of flooding and foot-and-mouth, especially on food prices, for inflation, but they were likely to have a temporary effect.
Mr King went on to say that the report is not a set guide to the future of interest rates.
"This report is not intended to signal anything about interest rates in the future. It is intended to give some guidance about our thinking about the economy.
"What matters in this report is that we are trying to help you get away from this terrible habit of people getting their rulers out to see precisely where this forecast will be in two years' time.
"If you are really interested about what will happen to interest rates¦ then forget getting out a ruler.
"Throw your rulers away! Be liberated! And start to think. That's what we are trying to do, to get you to think for yourself. By our identifying what to us are the main risks."
However analysts, with rulers in hand, have seen the report as a hint to a rate increase.
Howard Archer, chief UK and European economist at Global Insight, said: "The impression we get from the quarterly report and Mervyn King's accompanying remarks is that interest rates are more likely than not to rise to six per cent in the autumn, but the Bank of England is in no immediate hurry to raise interest rates again given the current major uncertainties surrounding both the inflation and growth outlooks."
He added that if interest rates of six per cent are to be avoided, then the monetary policy committee will need to see sustained, strong evidence over the coming months that economic growth is moderating and that underlying inflationary pressures are easing.
"On balance, the Quarterly Inflation Report reaffirms our belief that interest rates will rise to six per cent in October or November¦ We suspect that the Bank of England will keep interest rates at six per cent for an extended period."
Commenting on the inflation report, Richard Lambert, director-general of the CBI, called on the Bank of England to be cautious over raising interest rates.
He said: "Despite the recent rise in oil prices and possible pressures on food prices because of the recent flooding and bad weather in Europe, the bank should be cautious about any further increase in interest rates in the coming months.
"Pay pressures are subdued and there are signs that the impact of the five rate rises since last summer is beginning to take its toll on the economy, and the full effects are clearly yet to be felt."