In our project we use approach with short lived branches which are merged into master branch.
CI pipeline creates short lived application for almost every short lived branch.
Every short lived application should have own state of feature flags.
Is it fine to create new App Configuration using REST API for every short lived application to store feature flags?
"Fine" here may be subjective. A standard tier App Configuration instance has a daily charge of $1.20 (latest pricing info). If you are creating one of these, even if for a short time, the daily charge will still be incurred. A free tier store could be used, but there is no SLA on free tier stores.
I don't think incurring a charge per pipeline execution is desired. I would try to use the
labelproperty of App Configuration key-values to separate the settings required by different pipelines.