And that claim will stun owner Roman Abramovich, whose current stars cost a staggering £271.65million in transfer fees alone.
Boss Ancelotti reckons his team will finish the season empty-handed because he did not have enough cover to cope with a mid-term injury crisis.
He said: "I don't think the squad was good enough this year.
"At the start of the season, we couldn't have envisaged having very important players out at the same time.
"We struggled to manage when we were without Lampard, Drogba, Essien, Terry and Alex.
"At one point this season we had to put right-back Paulo Ferreira in the middle of defence because we had lost all our other centre-backs.
"You cannot think at the beginning of the season that you would have all these players out. In the bad moments, it was difficult for us to move on without these players and I think it cost us quite a few points.
"It wasn't just their technical quality which we missed but also their personality and their character."
Latest figures show Chelsea have splashed £185m in the last five years putting them behind Manchester City, Spurs and Liverpool in the big-spenders league.
The Blues submitted a squad list of just 21 players, including three goalkeepers, to the Premier League while none of their Under-21 stars is currently in contention for a place in the team.
Yet Ancelotti still insists he was right to go along with Abramovich's plan to trim the squad which won the League and FA Cup double last year.
And he claims he has no regrets at dumping established internationals Michael Ballack, Ricardo Carvalho, Joe Cole, Deco and Juliano Belletti just to get the wage bill down.
Ancelotti added: "I agreed with the club's philosophy to replace very important players with youngsters. Last summer was a good time to do that.
"Before our difficult moment we gradually used those young players like Kakuta, Sturridge and McEachran.
"But in the difficult moment it was harder to put the responsibility on them and that is why we bought Fernando Torres and David Luiz in January."
Ancelotti now concedes the title race was lost to Manchester United during a desperate run of form in November and December when they took just 10 points from 12 Premier League games.
He said: "In the last couple of months we have done very well in the Premier League and won a lot of games.
"We are very close to Arsenal and not so far from Manchester United. Two months ago, to be in this position was just a dream.
"But we're still eight points behind United with only six games to go. That gap does not allow us to think we can win the title.
"Maybe we can finish second - but it's not important for Chelsea if we are second or third. At the start of the season my dream is only to win, not to finish second place.
"The first target for Chelsea is to win the title. The next is to reach a position that allows us to play in the Champions League next season."
Ancelotti has set his team a target of winning all six of their remaining games, starting with tonight's home match against struggling Birmingham.
But even maximum points will not save him from the sack at the end of the season and he is now refusing to discuss his future despite admitting he will not have a problem if he is replaced by Abramovich. Ancelotti added: "Obviously I have a plan for next season but it's not good to reveal it now.
"I have not spoken to the players about it and I'm not involved in extending their contracts.
"But they are all good professionals and they understand that sometimes in football the manager can change. They are working with me at the moment and maybe will work with me in the future or maybe they will work with another coach."
November's defeat at Birmingham was one result which the Chelsea might look back on as ultimately costing them their title.
Ancelotti admitted: "That game was one of our best performances this season. We didn't win and were really unlucky."
Alex McLeish's men have taken seven points from nine to haul themselves out of the drop zone - following a nightmare run after their Carling Cup triumph.
Ancelotti said: "They're not out of fighting from relegation entirely, so they need to take a point. It will be a tough game.
"They have good organisation and will try and play on the counter-attack, as they did against us in their home game."
