UK inflation is expected to rise above 4% by the end of the year, fuelled by rising energy costs, the Bank of England has warned.
The Bank also said that there were signs the supply chain crisis was starting to hamper the economic recovery, and revised down its growth forecast for the third quarter by 1%.
It came as the Bank's Monetary Policy Committee held interest rates at 0.1%
Despite the inflation forecast a rate rise was not yet needed, the MPC said.
Factors driving higher inflation were still expected to moderate next year, the policymakers said.
Supply constraints were hitting recovery and there are signs "cost pressures may prove more persistent."
Supply chain challenges evident in shops, ports and forecourts are now having a material impact on the recovery from the pandemic.
The Bank of England has revised down its expectations for economic growth in the current three month period.
In addition to these supply challenges, there are shortages from workers to microchips, which may mean inflation proves to be "more persistent".
Interest rates were unanimously kept on hold at the record low level of 0.1%.
But two of the nine members of the Monetary Policy Committee, including a deputy governor, voted to stop the Bank buying government bonds on account of inflation worries.
Supply chain factors now holding growth back and there is also renewed concern that more than a million workers are stuck on the furlough scheme.
The Bank will wait to see the impact of the end of furlough at least before turning off the tap of funds it is pumping into the economy.
The Bank said that supply constraints were "evident in surveys showing historically lengthy supplier delivery times and backlogs of work, significant material and labour shortages in a number of sectors, and lower levels of inventories".
Developments over the past month have "strengthened" the case made in August that some tightening of monetary policy could be necessary to meet the central bank's 2% inflation target sustainably in the medium term, policymakers said.
The MPC added that "considerable uncertainties remain". It said Consumer Prices Index inflation, currently at 3.2%, could remain above 4% into the second quarter of next year.
Hinesh Patel, a portfolio manager at Quilter Investors, said the Bank "clearly expects the inflation rate to be higher than previously feared".
"While they reiterate it will be transitory, it will no doubt be of major concern.
"Ultimately what is flowing through the system right now is 'bad inflation', that is: price rises are hitting the most vulnerable households, alongside the impacts of furlough on unemployment uncertainty," he said.
Last month, the Bank said it expected the economy to regain its pre-pandemic size in the final three months of 2021 and inflation to hit a 10-year high of 4% at the same time.