How the ‘double scar’ of past inflation, geopolitical shocks is hitting consumers

A “double scar” of past inflation woes and geopolitical trauma is warping how consumers view the economy and threatening a drop-off in retail spending, new research from the European Central Bank showed.

According to ECB researchers, euro area households have become more sensitive to the financial consequences of the Iran war due to cumulative economic wounds left behind by the post-pandemic inflation surge and the 2022 invasion of Ukraine, which resulted in soaring energy prices. 

“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,” they wrote in a blog post published on Friday, warning that these mental “scars” reinforce fears of stagflation – when rising prices coincide with declining growth. 

Data from the ECB’s March 2026 Consumer Expectations Survey showed that consumers had sharply revised inflation expectations upwards by 2.5 percentage points just one month after the conflict in the Middle East broke out in late February. Simultaneously, economic growth expectations fell by about 1.2 percentage points.

Oil prices have fallen some 20% in May, but remain about 30% above pre-Iran war levels.

While the general shift toward a stagflationary outlook is currently less severe than the energy-driven shock following Russia’s invasion of Ukraine four years ago, the researchers warned that a risk of overreaction remains as consumers extrapolate short-term fears into medium-term behavior. 

“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,” they 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.”

As the central bank works to manage the economic impact of current events, it is widely expected to raise interest rates by a quarter-point in June.

Macroeconomic anxiety is also translating directly into more conservative retail spending. 

Consumers are “hyper-aware” of mounting costs, according to Melissa Minkow, global director of retail strategy at CI&T.

“Grocery prices going up — those are routine purchases that consumers really feel hard hit the most,” she told CNBC’s “Squawk Box Europe” on Friday. 

“We have a very conservative consumer at this point in time, and they’ve become very picky with how they’re spending,” she said, adding that rising fuel charges are pushing up delivery fees that consumers intensely dislike.

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, Minkow said.