Will Postal Rates Decrease Next Year?

The many people who spent years crafting and redrafting the postal-reform law and its accompanying regulations overlooked a key issue -- deflation.

The 2006 law caps annual rate increases for most classes of postage at the rate of inflation, as measured by changes in the Consumer Price Index. The Postal Regulatory Commission developed regulations interpreting how to apply the CPI calculations in various circumstances. Except one: When there has been deflation rather than inflation.

"The Commission's rules are designed for price adjustment proposals during periods of inflation," the commissioners noted in a decision earlier this month.

It's almost certain, however, that the average monthly CPI for this year will be lower than the 2008 average. The CPI would have to increase at an annualized rate of more than 4.7% for the rest of the year for the U.S. Postal Service to have a rate cap above zero next year. The number for June was higher than that because of rising energy prices. But with that mini-bubble bursting and the recession continuing, changes in CPI are likely to be minimal or even negative the rest of the year.

Consider some of the questions that will arise if, for example, an inflation rate of about 2% for the rest of the year results in the average CPI for 2009 being 0.5% lower than in 2008:

• Would USPS have to decrease prices next May for First Class, Standard, Periodicals and other "market-dominant" classes by at least 0.5% (less any unused rate authority from this year)? The Postal Service says no because the law just limits the size of postage increases without referring to mandatory decreases.
• Could the Postal Service increase some rates next May and offset those with decreases in other rates of the same class? The answer is probably yes. The more difficult question is whether average rates in each class would have to be 0.5% lower or merely the same as today.
• If the CPI rises by 4% in 2010, would May 2011 rates be capped at 4% or at 3.5%? Logic says if there is no rate change next year that the 2011 price cap would be the difference between 2008 and 2010 CPI, about 3.5% in this scenario. But the PRC's price-cap methodology calls for comparing one year's CPI with the immediately preceding year's CPI (that is, 2010 to 2009), which would yield a price cap of about 4%.
  

So how should mailers budget for postage rates next year? Definitely do not count on a decrease: Nothing in the law or regulations would require that. My guess is that the Postal Service will be allowed to adjust rates as long as the average for each class does not increase.

For Periodicals, I would assume that relatively light publications will pay slightly higher postage rates next May, just as their increases were a couple of percentage points above the theoretical Periodicals price cap of 3.97% this year. More specifically, I would expect the basic carrier-route rate to increase while the pound rates decrease, as happened this year.

USPS justified the carrier-route increase by pointing to the decreasing value of carrier-route bundles from the Flats Sequencing System roll-out. Cynics cite another FSS-related reason: Postal officials have promised that efficiently packaged, dropshipped FSS copies will cost less when FSS-specific rates are introduced (reportedly in 2011) than dropshipped carrier-route copies do. Moving the goalposts – that is, increasing carrier-route piece rates – will make it easier for the Postal Service to reach that goal.