The Federal Reserve may need to turn to the kind of on-the-fly tactics it used to defuse the Great Recession in 2008, because self-correcting inflation models may no longer apply.

This is according to "What the 2008 Financial Crisis Tells Us About Today's Inflation Surge," by WSJ Chief Economics Commentator Greg Ip.

The models that the Fed and other central banks have used since the 1990s assume that inflation is self-correcting. Likewise, Ip writes, "The financial crisis was rooted in the assumption that markets are largely self-correcting, and individal firms and sectors could collapse without consequences for the broader financial system."

As a reminder, it was mortgage-backed securities that were the catalyst for the Great Recession. What bankers and economists failed to foresee and understand was just how interconnected the U.S. and, for that matter, the global financial systems are.

Likewise, battling inflation in 2022 cannot be rooted in traditional economic models that "base inflation on the level of aggregate demand rather than its composition," Ip says.

The complicated economic recovery that is shaping up post-pandemic is the reason why. For example, manufacturers did not foresee how a bottleneck in semiconductor chips would disrupt so many other supply chains for other goods and services, thereby rippling across many industries far and wide.

"This is reminiscent of the financial crisis when the Federal Reserve first thought subprime mortgage defaults would be contained because it didn't realize how an interconnected, highly leveraged financial system could amplify the effects," Ip says.

The Journal quotes from a "noteworthy" speech that Agustin Carstens, general manager for the Bank for International Settlements, gave this past Tuesday, in which Carstens said: "We need to be open to the possibility that the inflationary environment is changing fundamentally. The lens we used to interpret economic developments since the 1990s may no longer be adequate."

A low-inflation environment has been at the heart of central banks' monetary and fiscal policies in the past. The reward of such an environment for central banks has been the ability to "place more weight on other objectives," such as economic growth and full employment, Carstens said.

Carstens admitted that most central banks, including BIS, failed to see how pronounced inflation could be coming out of the pandemic. Stimulus spending by President Biden in 2021 may only have contributed only one or two percentage points of the current 7.9% inflation in the U.S.

Of greater significance is the pent-up demand for goods and services, as pandemic shutdowns have lifted. Consumer demand has exceeded economists' expectations.

Currently, the U.S. Federal Reserve continues to dismiss the idea that the nation is shifting from a low-inflation to a high-inflation environment. Federal Reserve Chairman Jerome Powell has continued to say that inflation is transitory.

However, Carstens says the BIS is troubled by how inflation in one sector of the economy is spilling over to others, as well as by current pressures to increase wages.

The bottom line, Ip says, is that central banks must prioritize battling inflation rather than growing economies, because the inflation the U.S. and other nations are grappling with today, is no longer self-correcting.

"If there's a silver lining, it's that central banks saw inflation like this in the 1970s, and know how to avoid a repeat, just as knowledge of the Great Depression helped them avoid a repeat in 2008," Ip writes.

"That didn't make the experience any more pleasant."