New research from the European Central Bank has found that a combination of past economic trauma and current geopolitical instability is distorting how consumers view the economy.
ECB researchers concluded that euro area households have grown more sensitive to the financial consequences of the Iran war, citing cumulative damage from prior economic shocks.
The researchers pointed specifically to the post-pandemic inflation surge and the 2022 invasion of Ukraine, which drove energy prices sharply higher 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 Friday blog post.
The ECB’s March 2026 Consumer Expectations Survey showed consumers revised inflation expectations upwards by 2.5 percentage points within one month of the Middle East conflict breaking out in late February.
At the same time, economic growth expectations fell by approximately 1.2 percentage points, reflecting a swift and significant shift toward a stagflationary outlook among households.
The researchers warned this mental scarring reinforces fears of stagflation, the damaging economic condition where rising prices coincide with declining growth across an economy.
“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,” they added.
Oil prices have fallen around 20% in May but remain approximately 30% above pre-Iran war levels, sustaining pressure on household budgets and retail conditions.
While the current stagflationary shift is described as less severe than the energy shock following Russia’s Ukraine invasion, the ECB researchers cautioned that the risk of consumer overreaction remains significant.
The central bank is widely expected to raise interest rates by a quarter-point in June as it works to manage the broader economic impact of ongoing instability.
Macroeconomic anxiety is also feeding directly into more conservative retail spending behaviour, with consumers pulling back on discretionary and routine purchases alike.
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 everyday spending categories.
“Grocery prices going up — those are routine purchases that consumers really feel hard hit the most,” Minkow said, highlighting how essential goods are bearing the sharpest psychological burden.
“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 also pushing up delivery fees consumers intensely dislike.
Minkow argued that retailers must respond quickly to cost-conscious shoppers and invest in technology to prepare for a new reality where the boundary between politics and retail is becoming increasingly blurred.