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The Bank of England has its hands tied, and there is very little it can do when it comes to combating inflation, according to governor Mervyn King.

In his annual report to Parliament, Mr King admitted he expected inflation would not return to the CPI annual rate of 2 per cent for at least two more years. The Monetary Policy Committee, he added, could have "little impact" on the path of inflation in the short term.

"It has not attempted to prevent inflation moving away from the target following the sharp rises in commodity prices," he said.

"To do so would have required a large increase in interest rates, with such a severe impact on output and employment that it would have risked inflation falling well below the target further out."

Mr King added that inflation would remain above 3 per cent until well into next year and that the MPC would have to continue with the "monthly dilemma" that has made its task so difficult since last summer, which is balancing the "risk that inflation expectations might be dislodged against the possibility that inflation might fall below the target".

Figures released last week by the CPI showed inflation jumped to 3.8 per cent in June from 3.3 per cent in May - higher than expected by City economists and almost double the Bank's 2 per cent target.

The Bank's official inflation benchmark is now at its highest level since CPI records began in January 1997. Based on historical data, inflation was last higher in May 1992.

The figures revealed food and non-alcoholic beverages rose 9.5 per cent over the last year, while transport costs rose 7.3 per cent, driven in particular by soaring petrol costs.

The news also comes shortly after the British Retail Consortium said food prices were 7 per cent higher in June than a year earlier, the highest annual food-price inflation since the series began.

The British Chambers of Commerce's latest quarterly economic survey also stated that firms in the services sector had seen "alarming" declines over the past three months, with those reporting lower orders outnumbering those reporting rises for the first time since 1990.

Many economists predict inflation could peak at 5 per cent by the end of the year.