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

A recent study conducted by the European Central Bank has highlighted the impact of past economic traumas and geopolitical events on consumer behavior and retail spending. The research points to a “double scar” effect, where memories of previous inflation surges and conflicts are influencing how consumers perceive the current economic landscape.

The aftermath of the post-pandemic inflation surge and the 2022 invasion of Ukraine have left lasting wounds on euro area households, making them more sensitive to the financial implications of events like the Iran war. These mental “scars” are fueling fears of stagflation, a scenario where rising prices coincide with economic stagnation.

Data from the ECB’s Consumer Expectations Survey in March 2026 revealed a significant shift in consumer sentiment following the outbreak of conflict in the Middle East. Inflation expectations surged by 2.5 percentage points, while economic growth expectations dipped by 1.2 percentage points. Despite a recent 20% drop in oil prices, they still remain 30% higher than pre-war levels.

While the current shift towards a stagflationary outlook is less severe than past geopolitical shocks, there is a risk of consumers overreacting and altering their spending habits based on short-term fears. The researchers cautioned that the combination of recent inflation spikes and ongoing geopolitical tensions could lead to a prolonged period of uncertainty that shapes consumer behavior in the months ahead.

As the central bank prepares to address the economic fallout from these events, a quarter-point interest rate hike in June is widely anticipated. In the retail sector, macroeconomic anxiety is directly impacting consumer spending habits, with rising costs prompting a more conservative approach to shopping. Melissa Minkow, global director of retail strategy at CI&T, noted that consumers are particularly sensitive to increases in grocery prices, which are felt acutely in their day-to-day expenses.

Retailers are now facing the challenge of catering to cost-conscious consumers and adapting to a new reality where political and economic factors are closely intertwined. Minkow emphasized the need for retailers to invest in technology and quickly adapt to changing consumer preferences in order to thrive in a market where financial uncertainties loom large.

In conclusion, the study underscores the complex interplay between past economic traumas, geopolitical events, and consumer behavior, highlighting the need for businesses to remain agile and responsive to evolving market conditions. Embracing technology and prioritizing customer needs will be key to navigating the current economic landscape successfully.