The “double scar” of past inflationary problems and geopolitical trauma has distorted consumers’ views of the economy and threatens to cause retail spending to fall, new research from the European Central Bank has found.
Eurozone households have become more sensitive to the economic impact of the Iran war because of the cumulative economic scars left by the 2022 invasion of Ukraine, which led to a post-pandemic surge in inflation and soaring energy prices, ECB researchers said.
“There is good reason to believe that consumer expectations are shaped not only by current trends, but also by memories of recent adverse events,” they wrote in a blog post published Friday, warning that such emotional “scars” could heighten fears of stagflation, the simultaneous rise in prices and decline in growth.
Data from the ECB’s Consumer Expectations Survey in March 2026 shows that just one month after the Middle East conflict erupted at the end of February, consumers significantly revised their inflation expectations upward by 2.5 percentage points. At the same time, economic growth expectations also fell by about 1.2 percentage points.
crude oil price Although it fell by about 20% in May, it remains about 30% above its pre-Iran war level.
Although the general shift to a stagflationary outlook is now less severe than the energy-driven shock that followed Russia’s invasion of Ukraine four years ago, the researchers warned that there remains a risk of overreaction as consumers apply short-term fears to medium-term actions.
“Evidence suggests that consumers are experiencing the Iran war with a potential ‘double scar’: one from the recent spike in inflation and the other from the long-term effects of previous geopolitical tensions,” they write.
“As conflict and macroeconomic uncertainty continue to rise, these two scars are likely to reinforce each other and shape consumer expectations and behavior in the coming months.”
The central bank is widely expected to raise interest rates by a quarter of a percentage point in June as it seeks to manage the economic impact of current events.
Retail spending takes a hit
Macroeconomic concerns are also directly impacting more conservative retail spending.
Consumers are “very aware” of rising costs, said Melissa Minkow, CI&T’s global director of retail strategy.
“Grocery prices are going up,” he told CNBC’s “Squawk Box Europe” on Friday. “It’s everyday purchases that are being hit the hardest for consumers.”
“We have very conservative consumers at the moment, and they’re very picky about how they spend their money,” he said, adding that rising fuel costs are driving up delivery charges, which consumers are very reluctant to do.
Minkow said retailers now need to invest in technology to respond quickly to cost-conscious shoppers and prepare for a new reality where the lines between politics and retail are increasingly blurred.
