The Reds' former defender believes Champions League qualification is a much more realistic goal after the 1-1 draw against the Blues at Anfield on Tuesday.
That result left Liverpool in fourth place, 10 points behind leaders Chelsea after 23 top-flight games and only three above Manchester City ahead of their clash with West Ham on Wednesday.
Indeed, Carragher believes the other sides near the top of the table are also close to giving up the chase and instead focusing on making the top four..
"It hasn't been a good January and it leaves it with very little chance, really," Carragher told Sky Sports of Liverpool's title hopes.
"I think possibly they had to beat Chelsea to give them, and the rest of the league, an outside chance. The title is maybe a distant dream if you like.
"You hope Arsenal can beat Chelsea at the weekend, and maybe we could talk about it a little bit more then, but I think at this moment the rest of the sides are more worried about the top four and being left out of the top four than the title.
"I think most people will see it as a good performance and a good lift, more for the top four than for the title.
"For Liverpool it wasn't just the fact they didn't lose the game, there's a feel-good factor because of a better performance - they came back after struggling."
Carragher feels the gap between Chelsea and Liverpool is highlighted most by the strength in depth of Antonio Conte's squad.
He said: "Do Chelsea have the strongest squad? They bring on Cesc Fabregas, they have a £30million striker in Michy Batshuayi who never plays.
"They have John Terry - they have got a very strong squad. That's the difference certainly to Liverpool."