Postal Rate Hikes: Less Than 4% in 2009

For a more in-depth discussion of how the CPI will determine next year's postal rates, see "Who's it gonna be, me or the PRC?"

Deflation of consumer prices means that next year's postal rates will almost certainly average less than 4%, rather than the 5% that most commentators were expecting until recently.

The Consumer Price Index decreased 1.9% in November, the Department of Labor announced today, following a 1.0% decrease in October. The average increase in prices for most classes of postage will generally be capped by the change in the average monthly Consumer Price Index for 2008 versus 2007. The new rates are scheduled to be announced in February and implemented in May.

Another 1.9% decrease in December would yield a rate cap of about 3.75%. No change in the December CPI would yield a cap of about 3.9%.

Recent deflation isn't all bad for the Postal Service: Lower energy prices will probably save the USPS at least several hundred million dollars, perhaps a billion dollars, this fiscal year.

The Postal Service reported that every 1% change in diesel and natural gas prices cost it $29 million during the last fiscal year, which ended on Oct. 31. With the average diesel price being down 22% and the average natural gas price being down 27% so far this fiscal year, that suggests energy savings of about $150 million so far this year.

Current prices are even lower -- down 37% for diesel and 39% for natural gas, according to the Department of Energy. The Postal Service's energy costs would have to be down an average of 35% this fiscal year for the savings to reach $1 billion.

By business standards, the Postal Service is a big gambler when it comes to energy costs. Unlike most freight and delivery businesses, the Postal Service cannot use fuel surcharges to pass higher energy costs along to its customers; its prices can be adjusted only once per year in accordance with changes in CPI.

Most major businesses facing that kind of situation would hedge their risk, using futures markets to minimize the uncertainty and fluctuations in their energy costs. But that's not the way government agencies operate, especially when there's a risk some Congressman will try to grab headlines by attacking USPS for playing around with derivatives.

That leaves the Postal Service benefiting greatly when energy costs are low but at risk of needing a Congressional bailout when energy prices spike. Sounds as if the Postal Service learned its risk-management techniques from the investment-banking industry.