Inflation looks set to rise gradually over the next two years, pushing above the Government's target rate, the Bank of England has warned.

In its quarterly inflation report, the Bank's key Monetary Policy Committee, which is responsible for setting interest rates, said the outlook was for "slightly higher" inflation than at the time of its last report in May.

The report blamed the recent fall in the value of the pound on the foreign exchanges for the rise in price pressures over the past three months.

It said the inflationary effect of the sharp fall in sterling had more than offset the recent weakening of pay pressures and the easing of growth in spending by consumers.

The MPC also warned Chancellor Gordon Brown's £43 billion public spending bonanza could add to price pressures.

It said Government spending was "marginally higher" than announced at the time of the Budget in March as Mr Brown had allowed Whitehall departments to carry forward more underspending from previous years.

"Depending on the extent of possible future underspending, these measures may make the small addition to overall demand growth," the report said.

The immediate outlook for the economy was for steady growth with underlying inflation around the Government's 2.5 per cent target rate.

"But overall demand and supply must remain in balance if that prospect is to be maintained," the report cautioned.

"This suggests that private sector domestic demand growth will need to slow in the period ahead, and pay pressures must not intensify."

The report said that the apparent cooling of the housing market was among the signs that the underlying momentum in the growth of consumer spending was easing.