World stocks rise to 2-month high as inflation eases

(Adds European shares open, adds quote, updates prices)

* MSCI AC World index up 0.5%

* UK inflation falls to 4.6% in October

* China's factory output, consumption beat forecasts

* Fed funds futures price in rate cuts by May

MILAN/SINGAPORE, Nov 15 (Reuters) - World shares extended gains on Wednesday and the dollar nursed its losses, as expectations of an end to a global rate hike cycle spurred on investors following benign inflation readings in the United States and Britain.

The MSCI world equity index < .MIWD00000PUS>, which tracks shares in 49 countries, rose 0.5% to its highest since mid-September, following a positive start in Europe and a rally across Asia, aided by a report of stimulus in China.

The pan-European STOXX 600 index rose 0.8% after data showed British inflation cooled more than forecast in October, hitting sterling and reinforcing bets the Bank of England will be cutting interest rates by the middle of next year.

"This sends a clear sign that the Bank's aggressive interest rate hikes are paying off, albeit slowly and at the expense of subdued economic activity," said Jeremy Batstone-Carr, at strategist at Raymond James.

"With the laggard impact of interest rates still to be felt, economic activity will likely remain weak in the months to come, leading to incremental eases on price pressures," he added.

The British consumer price index rose by 4.6% in the 12 months to October, slowing from September's 6.7% increase, according to the Office for National Statistics.

On Tuesday, data showed U.S. headline consumer prices were flat in October, against expectations for a 0.1% rise. Core CPI, at 0.2%, also came in below a forecast of 0.3%.

"I think the CPI number has just pushed the last person to cover their shorts," Naka Matsuzawa, Nomura's chief macro strategist, said on the phone from Tokyo.

He sees a "more complicated" process ahead, where stock market exuberance eventually collides with bond market expectations that an economic slowdown will drive rate cuts.

DOLLAR SPUTTERS

On Tuesday, the Nasdaq jumped 2.4% and the small-cap Russell 2000 index leapt 5%, although gains were set to lose momentum with U.S. futures up around 0.3%.

The dollar sputtered after slumping on Tuesday following the softer U.S. inflation print. The dollar index, which measures the currency against a basket of peers, stood at 104.2, not far from Tuesday's two-month low of 103.98.

Interest rate futures swung to price in an interest rate cut by the U.S. Federal Reserve as early as May, with a 30% chance it could come even sooner, in March.

After dropping 19 basis points (bps) on Tuesday in their biggest one-day drop since March, 10-year Treasury yields eased another basis point to steady around 4.43%. Ten-year German bond yields fell 2 bps.

U.S. retail sales, due at 1330 GMT, and an expected morning meeting between U.S. President Joe Biden and his Chinese counterpart Xi Jinping in San Francisco were the next focus for financial markets.

Sterling slid 0.3% to $1.246 as the cooler inflation print helped the British currency reverse part of Tuesday's surge against a falling dollar. That helped London stocks outperform, up 1.1%.. The euro inched 0.1% lower at $1.086.

CHINA SUPPORT

Adding to markets' cheer was strong industrial output and retail sales data in China and a report from Bloomberg News that China plans to provide 1 trillion yuan ($137 billion) of low-cost financing to boost the housing market.

MSCI's broadest index of Asia-Pacific shares outside Japan gained 2.7%, hitting its highest since mid-September. The Hang Seng rose nearly 4% in Hong Kong as mainland property developers rallied over 5%.

China's retail sales rose 7.6% in October, although that may have been flattered by the Golden Week holiday at the start of the month. Real estate remains in a deep funk, with investment in January-October down 9.3% year-on-year.

"It is clear that Beijing has been turning more proactive in recent weeks to help support the recovery," HSBC economists said in a note to clients. "With ongoing uncertainties highlighted by the property sector, we think Beijing will continue to step up support through both fiscal and monetary means."

China's strong data boosted commodity prices. Iron ore rallied to a 2-1/2 year high and was last up 0.9% and copper rose to a three-week peak in Shanghai. MET/L]

Brent crude futures steadied at $82.46 a barrel.

(Reporting by Danilo Masoni; Editing by Alex Richardson)