By Nikhil Sharma, Shashwat Chauhan and Pranav Kashyap

(Reuters) -European shares closed higher on Tuesday, buoyed by gains in the energy sector, while investors digested a slew of economic data that painted a mixed picture of the region’s economic health.

Europe’s premier index closed up 0.3% at 513.08 points, a level not seen in three weeks, as traders speculated on the implications of rising inflation and looming interest rate decisions.

The latest data showed an uptick in euro zone inflation for December — a development that, while expected, added a layer of intrigue to the economic narrative.

While the consensus remains that the European Central Bank is likely to proceed with interest rate cuts in January, in the markets the rate-sensitive real estate sector dropped 0.6%.

The construction & materials sector lost 0.4%.

The energy sector gained 0.8%, with Norwegian oil tanker group Frontline jumping 7.4%. [O/R]

French consumer prices rose less than anticipated in December, while Swiss inflation fell again, fuelling expectations for more interest rate cuts by the Swiss National Bank.

As the European Central Bank’s Jan. 30 policy meeting moves closer, the week’s inflation data becomes a focal point for market watchers.

Germany, Europe’s economic powerhouse, reported a bigger-than-expected rise in annual inflation for December, while Spain’s economy minister confirmed that GDP growth remained steady in the fourth quarter.

“Today’s print chimes with our view that while inflation should moderate over the course of this year, we haven’t quite seen the back of it yet,” said HSBC analysts in a note.

“The ECB might have a small downside surprise to process by the time it meets on 30 January, but it seems likely it will stay cautious as more light is shed over the lingering elements of uncertainty.”

Retailers gained 0.4% as UK’s Next advanced 3.7%, after the clothing retailer lifted its annual profit outlook for the fourth time in six months.

Industrial goods and services gained 0.4%, boosted by a 9.6% rise in heavy machinery & vehicles supplier Kion Group. The company has partnered with Nvidia and IT services provider Accenture to optimise supply chains with AI technologies.

Adding to the market’s recent fluctuations was a report suggesting a possible shift in U.S. President-elect Donald Trump’s tariff strategy — a report he later denied, keeping investors on their toes ahead of his Jan. 20 inauguration.

Last year, European equities struggled to keep pace with their global peers, hampered by tariff threats, a sluggish economy, and political uncertainties in major economies like France and Germany.

Deutsche Bank has upgraded its outlook on European equities to “overweight” citing an improving political climate, favourable macroeconomic conditions and the potential for stimulus measures from China this year.

Among other notable stocks, Sodexo slid 7.8% after the French food caterer missed market expectations on first-quarter organic revenue.

(Reporting by Nikhil Sharma, Shashwat Chauhan and Pranav Kashyap in Bengaluru, Additional reporting by Purvi Agarwal; Editing by Mrigank Dhaniwala and Janane Venkatraman; Editing by Hugh Lawson)

---