Friday, March 27, 2009

No Postal Rate Increase Next Year?

The chairman of the Postal Regulatory Commission was only partly correct when he told Congress this week that postal rates seem likely to rise less than 1% next year.

There's actually a good chance that the rates for market-dominant classes (such as Periodicals, Standard, and First Class) won't increase at all in 2010. But that may not be all bad news for the U.S. Postal Service.

Dan Blair's exact words were, "Should current inflation trends continue, the price adjustment for 2010 would likely be less than one percent."

He has a point: Even if the Consumer Price Index rises at an annualized rate of about 6.7% for each month during the rest of 2009, the Postal Service would only be able to raise rates by 1%. And if the inflation rate is only 4% each month for the rest of the year, the Postal Service will not be able to raise rates for the market-dominant classes at all. (Sorry, mailers, there's no requirement that the Postal Service reduce rates if the average monthly change in CPI is negative this year.)

Although consumer prices have risen at more than 5% (annualized) the past two months, the CPI in February was still more than 3.5% below its peak in July of last year. Fuel prices caused the CPI to spike in mid-2008, then crash late in the year, and now inch back up in early 2009.

The Postal Service has indicated it spent nearly $3 billion on fuel the last fiscal year (October 2007 to September 2008). By comparison, it may be on track to save $1 billion or more this fiscal year.

Low inflation also helps the Postal Service's labor costs. Many unionized employees who were recently due for cost-of-living adjustments got nothing because the CPI did not increase during the relevant period.

Ultimately, fuel prices, rate increases, and cost-of-living adjustments may not have much to do with the Postal Service's fate. Even getting relief from the Postal Service's unusually onerous retiree-healthcare obligation, as seems likely, may just delay the inevitable.

The Postal Service needs to make radical reductions in its costs -- by consolidating operations or reducing service, for example -- to match its declining revenues. Short of that, sooner or later it will run out of money.

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