The UK looks likely to ditch its manifesto commitment to increase the defence budget by 0.5% above inflation, despite calls from the defence secretary for a 20% spending boost.
A senior government source has acknowledged the inflation rate rising to 11% this year could mean the UK is forced to abandon its pledge.
"The manifesto was written before £400 billion had to be spent locking people up for their own safety because of the global pandemic," a senior government source said.
"There is a reality check on things that were offered in a different age which is the only reasonable thing that we can expect."
The source added: "The intention is always to honour manifesto commitments but they were made before £400 billion was spent coping with a global pandemic that none could have possibly foreseen."
It comes as Boris Johnson headed to a Nato summit to discuss a number of topics with other world leaders in Madrid, where they will consider how to further help Ukraine in its battle against Russia.
Europe Editor James Mates outlines what was discussed between some of the world's biggest economic powers on Tuesday
While there he claimed to reporters the UK would keep to its manifesto commitment, because inflation would not be calculated over the long term.
The 2019 Tory manifesto commitment was for the budget to be increased "by at least 0.5% above inflation every year of the new parliament".
Mr Johnson told reporters travelling with him to the Nato summit in Madrid: "We have been running way ahead of that target for a while now.
"We are confident that we will meet that, you don't look at inflation as a single data point, you look at it over the life of the Parliament and I'm confident we will meet that."
The PM defended the government's record on defence spending ahead of the meeting, saying it had made "massive commitments" to the armed forces.
Speaking in Germany before heading to Spain, Mr Johnson said: "Clearly we have to respond to the way threats continue to change but don't forget that we now have got a defence budget that is £24 billion bigger under the spending review - the biggest increase since the end of the Cold War.
"Last year the UK was the third biggest defence spender in the world. We are making massive commitments.
"As a result of what we have already committed we have put the biggest increase since the end of the Cold War, we have more that met our pledge to exceed the 2% floor."
Defence Secretary Wallace is calling on him to significantly boost defence spending in the years ahead to counter the growing threat from Russia.
He's reportedly written to Prime Minister Johnson calling for a 20% increase in defence spending to meet shortfalls in military capabilities.
He used a speech to the Royal United Services Institute to urge the government to agree further spending. The Cabinet minister said "if the threat changed so must the funding".
"For too long defence has lived on a diet of smoke and mirrors, hollowed out formations and fantasy savings when in the last few years threats from states have started to increase.
"Right now Russia is the most direct and pressing threat to Europe, to our allies and these shores. I am serious when I say there is a very real danger Russia will lash out against wider Europe. In these days of long range missiles and stealth distance is no protection."
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Asked about the defence boss's plea, a No 10 spokesman said: "In 2022, the PM announced the largest increase in defence spending since the Cold War. That cemented our position as the biggest defence spender in Europe.
"That was a £16.5 billion increase over four years. That meant we could continue to provide crucial military support to Ukraine as well as allowing us to invest in a range of capabilities such as vehicles and drones and other areas of defence capability.
"Departmental spending on matters like that are for the chancellor and are part of fiscal events. The prime minister has always said we would respond to any changes in terms of threat which is why we announced the extra funding for the Ministry of Defence."
It is expected that Nato leaders will today agree the biggest overhaul of the Western military alliance since the end of the Cold War.
It comes amid warning from General Sir Patrick Sanders, the Army's chief of the general staff, who said the UK is now facing its "1937 moment" - a reference to the run up to World War II, where Britain was forced to decide whether to tackle Nazi Germany.
But the prime minister told broadcasters he doesn't believe the UK would need to engage Russia in direct conflict.
"I don't think it will come to that. Clearly we are working very hard to confine this to Ukraine.
"Putin and the Kremlin are going to try to widen the conflict and say that this is something to do between Nato and Russia - that is not it at all.
"This is about an invasion of an independent sovereign country. It is about the West and the friends of Ukraine giving them the support they need to protect themselves."
Minister Chris Philp told ITV News the UK would be ready to enter conflict with Vladimir Putin's forces should it become necessary after the head of the Army said troops must be prepared to “fight and win” to prevent the spread of war in Europe.
"We're always going to be ready to face whatever threat may emerge. I wouldn't expect us to be fighting Russia.
"It would be literally insane for Russia to enter into a direct conflict with Nato, but we're always going to be ready," the minister said.
The PM's comments in Germany were made at the conclusion of a G7 summit, where he met with world leaders such as US President Joe Biden and France's Emmanuel Macron.
His tour of Europe comes following two bruising by-election defeats last week in Wakefield as well as Tiverton and Honiton where the Tories lost to Labour and the Liberal Democrats respectively.
Former minister Oliver Dowden resigned as party chairman in protest over the disappointing results but the PM managed to win a parliament vote on Monday over legislation that would allow the government to override a key Brexit agreement, despite whispers of another Tory rebellion building momentum.
Senior backbench MPs including former PM Theresa May attacked the Northern Ireland Protocol Bill, saying it would be illegal to tear up parts of an international agreement, but not a single Conservative voted against it.
The government won by 295 votes to 221 — a majority of 74.