Annual headline inflation hit a three-year high in the United States last month, but decelerated slightly on a monthly basis while a measure of underlying price pressures eased—averting a widely feared intensification and reinforcing the case for the Federal Reserve to hold rates steady.

The Bureau of Labor Statistics’ consumer price index rose 0.5% in May, slowing from April’s 0.6% gain. On a year-over-year basis, prices climbed 4.2%, up from 3.8%, as rising energy costs from the Iran conflict continued to feed through. The reading matched the consensus forecast.

Core inflation—more important from a monetary-policy standpoint—remained more restrained, as softening shelter costs and a pullback in discretionary spending among households squeezed by the oil-price shock continued to offset broader pressures. Stripping out food and energy, prices rose 0.2% on the month, easing from March’s 0.4% pace. The year-over-year rate edged up to 2.9%, from 2.8% previously.

Treasury yields are edging lower at the policy-sensitive front end of the curve and the dollar is reversing last night’s gains against its major counterparts as traders trim bets on a Fed rate hike before year-end.

The release comes as equity indices extend their losses and oil prices rebound following another outbreak of hostilities between the United States and Iran. Technology stocks have hit a patch of turbulence as investors grow wary of soaring valuations and worry that a wave of capital-raising could strain public markets. The US, meanwhile, carried out strikes against Iranian military targets after President Trump said Iran had downed an Apache helicopter over the Strait of Hormuz; Tehran’s Revolutionary Guards said they retaliated with missile and drone attacks on American facilities in Bahrain, Jordan and Kuwait. Global crude benchmarks climbed around 2% this morning after Trump posted on his social media platform: “They’ve taken too long to negotiate a ​deal that would have been great for them, now they will have to pay the price!!!”