New research from the European Central Bank shows that a “double scar” of past inflation and geopolitical trauma is distorting how consumers view the broader economy.
ECB researchers found that euro area households have grown more sensitive to the financial consequences of the Iran war due to cumulative economic wounds left over from previous crises.
Those prior wounds include the post-pandemic inflation surge and the 2022 invasion of Ukraine, which resulted in soaring energy prices that battered household budgets across the continent.
“There is good reason to believe that consumer expectations are shaped not only by current developments, but also by memories of these recent adverse events,” the researchers wrote in a blog post published on Friday.
The ECB researchers warned that these mental “scars” are reinforcing fears of stagflation, the damaging economic condition where rising prices coincide with declining growth.
Data from the ECB’s March 2026 Consumer Expectations Survey showed consumers sharply revised inflation expectations upwards by 2.5 percentage points just one month after the Middle East conflict broke out in late February.
At the same time, economic growth expectations fell by approximately 1.2 percentage points, reflecting a broad shift in consumer sentiment following the outbreak of hostilities.
Oil prices have fallen roughly 20% in May but remain about 30% above pre-Iran war levels, keeping pressure on household energy and transportation costs.
While the current stagflationary outlook is less severe than the shock following Russia’s invasion of Ukraine four years ago, researchers warned that a risk of consumer overreaction remains.
“Evidence suggests that consumers are experiencing the war in Iran with a potential ‘double scar.’ One from the recent surge in inflation, the other from the prolonged effects of earlier geopolitical tensions,” the researchers wrote.
“These two scars may reinforce each other and are likely to shape consumer expectations and behaviour in the coming months, as conflicts and heightened macroeconomic uncertainty persist,” they added.
The central bank is widely expected to raise interest rates by a quarter-point in June as it works to manage the economic fallout from current events.
Macroeconomic anxiety is also translating directly into more conservative retail spending, with consumers cutting back on discretionary purchases and scrutinizing routine expenses more carefully.
Melissa Minkow, global director of retail strategy at CI&T, told CNBC’s “Squawk Box Europe” that consumers are now “hyper-aware” of mounting costs across the board.
“Grocery prices going up — those are routine purchases that consumers really feel hard hit the most,” Minkow said during her Friday appearance on the program.
“We have a very conservative consumer at this point in time, and they’ve become very picky with how they’re spending,” she said, noting that rising fuel charges are pushing up delivery fees that consumers intensely dislike.
Minkow said retailers must now react quickly to cost-conscious shoppers and invest in technology to prepare for a new reality where the line between politics and retail is becoming increasingly blurred.