By Shubham Batra and Amruta Khandekar
(Reuters) -Europe's blue-chip stocks hit their highest in 22 years on Wednesday as investors sought mega-cap quality stocks and as investors weighed whether the Federal Reserve could pause its rate hikes after evidence of cooling U.S. inflation.
The blue-chip STOXX 50 index touched its highest since 2001 prior to the inflation data, but came off that level later, eking out only marginal gains for the day.
The pan-European STOXX 600 index ended 0.1% higher, also having chopped early gains.
A U.S. Labor Department report showed the Consumer Price Index climbed 0.1% last month after advancing 0.4% in February. The core CPI, however, gained 5.6% year-on-year last month after rising 5.5% in February.
While the data had fuelled hopes of a pause in rate hikes, leading to a rally in global markets earlier in the day, analysts cautioned the headline figure remained above the Fed's target and the central bank is likely to press forward with a 25 bps rate increase at its May meeting.
"If we look at the headline inflation, it was good of course, but the core CPI is still quite sticky. So probably it's too soon to stop the hiking cycle of the Fed," said Michele Morra, Portfolio Manager at Moneyfarm.
European Central Bank officials also have been voicing concerns about sticky inflation, with Austrian Central Bank chief Robert Holzmann telling a German newspaper that another 50 basis point rate hike may be needed in May.
Rate-sensitive real estate stocks were the top sectoral gainers on the STOXX 600 on Wednesday, rising 1.1%, while travel and leisure and technology stocks limited gains.
Defensive healthcare and utilities shares were a big boost to the blue-chip STOXX 50.
Investors are still digesting the International Monetary Fund's warning that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year.
Luxury group LVMH (EPA:LVMH), Europe's most valuable company, is due to report first-quarter sales after markets close.
Shares of AB Volvo jumped 7.4% as the truck-maker reported record first-quarter profit on higher revenue and margins.
Mercedes-Benz Group gained 1% after its first quarter sales rose on a boost from electric vehicles and premium cars.
Germany's Merck slid to the bottom of the STOXX 600, falling 7.4%, after the U.S. health regulator paused the initiation of new patients on the company's evobrutinib drug.