Investor/ An insider's guide to the market: The latest Irish consumer price index data sent the clearest signal yet that the economy may be overheating.

The overall measure ticked up to 4.5 per cent year on year in August, compared with July's 4.2 per cent. The core rate of inflation, which excludes food and energy, rose by 2.3 per cent. But the European inflation measure rose to an annual rate of 3.2 per cent. This is well above the euro-zone average of 2.3 per cent, and is the highest since May 2003.

Mortgage interest costs and energy prices account for about half of the annual increase in prices. A more recent worrying trend is the acceleration in services sector inflation, which is now running at 7 per cent year on year, compared with the 1.7 per cent rate for goods inflation.

Given strength in consumer demand, it is likely that services sector inflation will remain high until there is some slowdown in the pace of economic growth.

Energy costs will add to pressures as the 33 per cent rise in gas prices bites in October, followed by the near 20 per cent increase in electricity prices in January.

There is a positive side to the boom in the form of improved Exchequer finances. Tax revenue in August was almost 16 per cent higher than in August last year;revenues year to date are up 13 per cent over the same period last year. This compares with a full year forecast of 6.1 per cent.

With Irish financial markets now fully integrated into the euro zone, domestic economic data tends to have a marginal impact on Irish bond yields and the Irish stock market. Consequently, there was no discernible reaction in the Irish equity market to the bad news on inflation.

Indeed, it could be argued that the higher rate of inflation will feed through into higher profits from the domestic operations of quoted Irish companies. However, the data emerging from the economy is probably creating unease among international investors. If the current trend in inflation is maintained for a prolonged period of time, it will have a cumulative negative impact on Irish competitiveness.

A more worrying issue is a palpable and growing sense of unease that the economy is getting seriously out of balance.

International sentiment is something that Irish investors need to keep under careful review. Fortunately, the current financial performance of Irish quoted companies is so strong that it will continue to outweigh those macroeconomic worries for the foreseeable future.

Excluding Elan, Investor now expects a 20 per cent-plus rate of growth in corporate profits from the Irish market in 2006. Furthermore, on the basis of forward-looking statements from company chairmen over the past few weeks, earnings growth in 2007 should also be strong.

The upcoming flotation of Aer Lingus will provide an interesting litmus test of investor sentiment. The offer, announced this week, will consist of the sale of 208.4 million new ordinary shares by the company and 72.7 million sale shares by the Government.

The indicative price range is €2.10-€2.70, which will value the firm at €1.1 billion-€1.3 billion. Immediately after the offer, in excess of 50 per cent of the company's issued share capital will be held by Irish shareholders.

Members of the public in the Republic and the UK may apply for new shares in the intermediaries segment of the offer, through participating stockbrokers, subject to a minimum amount of €10,000. Private investors have until 10am on September 21st to apply.

From the perspective of the private investor, getting truly independent advice for offers such as this is extremely difficult, given the involvement of so many financial advisers in the flotation process.

Airline shares are notoriously volatile and business conditions can change dramatically even over a short space of time.

A critical short-term influence is oil price and this has begun to move in the right direction in recent weeks. If this weaker oil price trend is maintained through the flotation period, investor interest should be strong enough to ensure a successful flotation.

Investor says...

The upcoming flotation of Aer Lingus will provide an interesting litmus test of investor sentiment. If the weaker oil price trend is maintained through the flotation period, investor interest should be strong enough to ensure a successful flotation.