Geopolitical Risk and Scarring Effects on Consumer Expectations: Insights from the Wars in Ukraine and Iran

Olivier Coibion, Dimitris Georgarakos, Yuriy Gorodnichenko, Geoff Kenny, Justus Meyer, and Trixi Pairan delve into how geopolitical shocks impact consumer expectations surrounding inflation and economic growth. This analysis focuses on the ramifications of the wars in Ukraine and Iran, particularly how these conflicts shape public economic sentiment and behavior, creating lasting “scars” that influence responses to later events.

Recent trends in inflation and growth expectations among consumers in the euro area demonstrate a notable responsiveness to geopolitical turbulence. By utilizing data from the ECB’s Consumer Expectations Survey (CES), the authors draw parallels between household reactions to the Ukrainian invasion in 2022 and the more recent conflict in Iran in 2026. This examination reveals that memories of heightened inflation from prior conflicts can amplify current apprehensions, particularly concerning stagflation—characterized by simultaneous inflation and stagnation.

How Geopolitical Conflicts Influence Consumer Expectations

The incursion of Russian forces into Ukraine marked a significant jump in energy prices and escalated worries of stagflation, aggravating pre-existing inflationary pressures stemming from the recovery phase post-pandemic. The ongoing conflict and subsequent geopolitical provocations contribute to a state of increased macroeconomic uncertainty. Despite the distinct consequences of the two wars, indicators suggest that the conflict in Iran is likely to elicit similar responses from euro area consumers, notably through rising energy costs and pronounced economic unpredictability.

Data gathered from the CES in March 2026 illustrates this responsiveness vividly; inflation expectations surged following the breakdown of hostilities in Iran, echoing patterns observed after the Ukrainian invasion. Specifically, consumer inflation expectations recorded an uptick, with median figures showing a noticeable upward revision averaging 2.5 percentage points, while growth expectations declined by approximately 1.2 percentage points. Although these shifts appear slightly less pronounced compared to the aftermath of the Ukrainian war, they nonetheless signal a growing concern among consumers.

The “Double Scar”: Amplifying Current Reactions through Past Experiences

Many households carry the dual burden of experiences from the inflation surge following the pandemic and the conflict in Ukraine. This historical backdrop heavily influences their current economic outlook in early 2026, having endured unprecedented inflation rates and the trauma of war in Europe. Research indicates that both personal experience and collective memory can significantly shape economic behavior and expectations. Consequently, consumers’ heightened sensitivity to new geopolitical shocks often leads to a more entrenched perception of stagflation, further complicating their economic interactions.

The CES findings affirm that these scars result in heightened consumer vigilance towards inflation. For instance, nearly half of surveyed individuals in January 2023, amid substantial inflationary pressures, reported close attention to price trends. This vigilance persisted even as inflation rates began to stabilize, indicating a lasting effect rooted in the experiences of prior inflationary environments. Following the Iranian conflict’s onset, attention to price changes surged back to nearly 50%, suggesting that recent events have effectively reignited consumers’ fears of inflation.

Trust and Communication: Cornerstones for Anchoring Consumer Expectations

Research emphasizes the critical role of trust in the European Central Bank (ECB) in stabilizing inflation expectations among consumers during times of geopolitical strife. The CES data indicate that consumer confidence in the ECB has seen an improvement corresponding with decreasing inflation rates, suggesting a correlation between trust and the adjustment of inflation expectations in response to geopolitical volatility.

When the ECB is perceived as credible and capable, consumers are more inclined to view deviations in inflation from targeted levels as transitory and to expect effective monetary policy interventions to restore stability. Conversely, diminished trust tends to exacerbate anxiety, prompting consumers to revise expectations more drastically. Recent surveys illustrate that consumers displaying higher trust in the ECB increased their inflation expectations less than those with lower trust levels during periods of geopolitical tension.

This suggests that fostering communication and reinforcing the credibility of the ECB are essential for effective monetary policy transmission amidst geopolitical challenges and macroeconomic uncertainties. The current landscape presents a pivotal opportunity for the ECB to engage deeply with the public, ensuring ongoing development of trust and understanding regarding monetary policies.