Consumer prices fell for a third straight month in June due to lower energy costs, according to a government report on Friday that pointed to subdued inflation pressures amid sluggish domestic demand.

The Labor Department said its seasonally adjusted Consumer Price Index dipped 0.1 percent last month after falling 0.2 percent in May. Analysts polled by Reuters had forecast consumer prices to be flat last month.

Consumer prices have not declined for three successive months since the period from October to December 2008.

But excluding volatile energy and food prices, the closely watched core measure of consumer inflation edged up 0.2 percent after gaining 0.1 percent in May. Markets had expected core CPI to rise 0.1 percent last month.

The CPI is quite low, it'll reinforce the thinking within the Fed that they can afford to keep interest rates low, said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

Treasury debt prices turned negative after the data, while the U.S. dollar pared losses versus the yen. U.S. stock index futures were slightly higher.

In the 12 months to June, the consumer price index rose 1.1 percent, the smallest advance since October, after increasing 2 percent in May, the Labor Department said. Markets had expected a 1.2 percent increase in June.

Recent data ranging from consumption to manufacturing imply a recovery from the longest and deepest recession since the 1930s may have stalled in recent months.

Lackluster domestic demand has left producers and businesses with little pricing power, keeping inflation subdued and giving the Federal Reserve room to maintain its low interest rate policy well into next year.

Government data on Thursday showed prices received by farms, factories and refineries fell for a third straight month in June.

Some analysts are even starting to worry about deflation -- an economically disabling, broad-based decline in consumer prices.

Last month, energy prices fell 2.9 percent after falling by the same margin in May. Gasoline costs fell 4.5 percent after dropping 5.2 percent in May. Food prices were flat for a second straight month in June.

The monthly core inflation rate was bumped up by a 0.8 percent in apparel costs. Used cars and trucks, which rose 0.9 percent last month, also contributed to the rise in core inflation.

In the 12 months to June, the core inflation rate rose 0.9 percent, increasing by the same margin for a second straight month. The rise was in line with market expectations.

(Reporting by Lucia Mutikani, Editing by Chizu Nomiyama)

Inflation Consumer price index