Mailers Rallying Against Rumored 10% Postage Hike

Mailing-industry leaders fear that the U.S. Postal Service is on the verge of requesting emergency rate increases of up to 10%.

After lying dormant for a couple of years, the multi-industry Affordable Mail Alliance was reorganized on Friday to fend off expected "exigent" (higher than inflation) rate increases for the ailing Postal Service. The group started rallying mailers today to contact members of the USPS Board of Governors, which is rumored to be discussing such rate increases when it meets next week.

The alliance was formed in 2010 when USPS sought to solve its financial problems by sidestepping the inflation-based cap on rate increases for First-Class, Standard, and Periodicals mail. That attempt failed, but this time the Postal Service is in more dire circumstances, perhaps only months from running out of cash.

When the Board of Governors backed down in April from a money-saving plan to curtail Saturday delivery, it asked postal management to examine options for increasing revenue. It specifically mentioned the possibility of exigent increases, especially for supposedly unprofitable classes like Standard flats and Periodicals.

One scenario being discussed among mailers is an exigent increase of 5% to 7% for all market-dominant classes plus an additional 3% for the unprofitable classes. That's on top of the usual inflation-based increase, which could be close to 2% in January.

Annual rate hikes for the market-dominant classes are generally capped by changes in the Consumer Price Index. But the law also has a provision “whereby rates may be adjusted on an expedited basis due to either extraordinary or exceptional circumstances.”

The law, however, does not provide the Postal Regulatory Commission clear guidelines as to what constitutes "extraordinary or exceptional circumstances" justifying a special rate hike.

Mailers have questioned whether exigent rate increases would actually backfire by shaking confidence in USPS and the stability of postage rates, which would accelerate the shift to other media.

In a related matter, the PRC today rejected the Postal Service's proposal to use a one-time "Technology Credit"to justify rate increases, a gambit described in New Postal Incentive Could Backfire for Mailers.

Related articles:

• Publishers May Pay To Preserve Saturday Delivery  
• PRC Decision Only a Partial Win for Mailers  
• Affordable Postage A Key To Printing Industry's Future, Quadracci Says  
• Greece Is the Word for USPS, Donahoe Says

New Postal Incentive Could Backfire for Mailers

Mailers should beware of postal officials bearing gifts.

The U.S. Postal Service announced a few days ago a “Technology Credit” of up to $5,000 for mailers who use Full-Service Intelligent Mail Barcodes. But if the Postal Service gets its way, the one-time credit would result in a permanent and ultimately far more expensive price increase for senders of First Class, Standard, Periodicals, and Bound Printed Matter mail.

And it would set a precedent for similar efforts to circumvent the inflation-based price cap on most postal rates.

“The purpose of the Technology Credit is to offset a portion of the investment by mailers in the hardware and software changes necessary to support Full-Service mailings,” the USPS filing said. Mailers already have another incentive to go Full Service by Jan. 26, 2014: After that, only mail with Full Service IMbs will receive automation discounts.

At an estimated cost of $66 million, USPS will provide credits to mailers that have mailings containing at least 90% Full-Service pieces between June 1, 2013 and May 31, 2014.

Here’s the catch: USPS is asking the Postal Regulatory Commission to consider the credits a price decrease for purposes of calculating the price cap for the next round of rate changes. Without such consideration, USPS claims it would be discouraged from offering future credits that promote more efficient mailing practices.

The logic of the request seems to be that the Postal Service would be paying out credits of $66 million to mailers in the coming months, so it should be able to balance that with $66 million worth of price increases next year.

But consider the case of a major magazine that now pays $10 million annually in Periodicals postage and earns the $5,000 Technology Credit. If the Consumer Price Index doesn’t change during the course of 2013, the magazine normally would not face a postage increase next year.

With the Postal Service’s request, however, even with no inflation the Periodicals rate cap would increase an estimated one-quarter of a percent. That increase would cost the magazine almost $25,000.

And if the inflation rate remained zero percent for another year, again the magazine’s postage bill would be $10,025,000 – instead of the even $10 million it would be if the USPS's request is denied

In other words, if the Postal Service is successful, the magazine would get a $5,000 credit this year and in return pay a recurring charge of almost $25,000 annually. With a return on investment like that, no doubt postal officials would look for other one-time credits they could “give” mailers.

The PRC has set a deadline of May 6 for comments on the Postal Service’s proposal.

Other articles about postal price-cap controversies include:

• No Such Thing as a Free Ounce: Does 'Second Ounce Free' Make Sense for USPS or for Mailers?  
• Publishers May Pay To Preserve Saturday Delivery
• Postage Rates Could Rise 1.8% As USPS Wins Rate Ruling  
• Will Postal Rates Decrease Next Year?

Why Mailers Support Radical Downsizing of the Postal Service

If you want to know why major mailers are generally supporting major cost cuts at the U.S. Postal Service, consider this recent quotation from magazine-industry veteran Tom Martin:

“When you look at the Three Ps, in 2000, printing was 45 percent to 55 percent of costs, paper was probably 20-25 percent of your costs, and postage was between 30 to 32 percent of overall costs,” the Cygnus Business Media executive told Folio: magazine. “But now the printer is probably sitting with only 32 to 35 percent of overall costs. Paper hasn't changed that much on a percentage basis but the number that has changed tremendously is postage. That's probably sitting at 42-46 percent of overall costs depending on the magazine.”

Martin’s insight rings true not just for the B2B magazines in Cygnus’ portfolio but also for the large consumer magazines – and in fact for every mail-dependent organization. While everyone else in the ink-on-paper world has been slashing costs in the past decade, the Postal Service mostly just passed cost increases along to its customers and only in the past few years got serious about real efficiency gains.

That’s why mailers think the Postal Service is ripe for some serious downsizing. (But they had better be careful what they wish for, as Dead Tree Edition will explain tomorrow in Mailers Getting Cold Feet About Postal Service Cuts.)

As for Martin’s statement, here’s what’s happened to the “three Ps”:

Prices for publication printing have been dropping at about 3% to 4% per year (NOT adjusted for inflation) for more than a decade. Prices for coated paper have fluctuated greatly but are almost exactly identical (NOT adjusted for inflation) to what they were 10 years ago.

But USPS rates for most types of postage rose faster than the rate of inflation rate during the first half of the past decade and increased in line with the inflation rate the past few years.

Postal executives complain that their rate increases are limited “only” to changes in the Consumer Price Index. But most mailers have no sympathy for those complaints: They’re happy if they can avoid cutting the prices they charge and would be ecstatic if they had the kind of guaranteed price hikes the Postal Service enjoys.

Mailers believe the Postal Service only got serious about cost cutting when it was forced to do so – by declining demand for mail and the CPI-based price cap. And despite USPS’s aggressive downsizing the past couple of years, mailers still see a system that has far too many post offices, sorting facilities, and people (especially supervisors) than it needs to handle current or future mail volume.

Related articles:

• The USPS's Radical Plan: Good in theory, potential chaos in reality: D. Eadward Tree's new article for Publishing Executive magazine, which explores why mailers should be cautious about how and how quickly the Postal Service is downsized.
• Postal Service Has Too Many Employees and Pays Them Too Much, Mailer Groups Say: USPS has 170,000 too many employees, according to a coalition of major mailer groups.
• Why Are the Postal Service's Financial Problems Such a Surprise?: Explores how USPS has been bailing out the federal government for years.

USPS Delay Means Smaller Price Increases for Mailers

If only every Postal Service delay were this beneficial to customers . . .

The maximum 2011 price increase on most types of mail dropped a bit this morning because the U.S. Postal Service did not submit price increases before the Consumer Price Index for November was released.

The price cap on such market-dominant classes as First-Class, Standard, and Periodicals dropped to 1.741%, down from 1.799% if USPS had announced price increases before today. The cap is likely to drop below 1.65% if the Postal Service waits for the December CPI to be released on Jan. 14 before submitting 2011 price increases.

As explained in Postage Rates Could Rise 1.8% As USPS Wins Rate Ruling, the Postal Service didn't know how inflation-based price caps would be calculated for next year until the Postal Regulatory Commission released a complex ruling late Friday.

USPS Seeks Guidance On Its Rate Cap

The U.S. Postal Service is asking for a ruling on something that was supposed to be clear -- how much it can increase rates without getting special permission.

A Postal Service lawyer asked the Postal Regulatory Commission today for guidance regarding how to interpret the price cap on most mail products (including First-Class, Standard, and Periodicals), which is based on changes in the Consumer Price Index (CPI-U).

When the PRC announced its decision last week in the exigent rate case, "some uncertainty was expressed regarding the exact amount of authority that is currently available to the Postal Service to adjust rates under the CPI-U price cap," wrote R. Andrew German, managing counsel for USPS Pricing & Product Development in a letter to the PRC.

The PRC's Web site has a chart suggesting that the current price cap is 1.477%, which is based on the average CPI for the most recent 12 months versus the previous 12 months (that is, September 2009 to August 2010 versus September 2008 to August 2009).

But German noted that "it has been more than 12 months since the Postal Service adjusted rates pursuant to the price cap," which seems to mean that a different calculation method should be used.

German referred to a section of the PRC's regulations regarding rate increases that are more than 12 months apart. My interpretation of that section is that the current rate cap would be based on comparing the average CPI for the most recent 12 months to the average CPI for calendar year 2008, yielding a cap of only 0.864%. But I'm no lawyer, and the wording is far from clear in this case.

"For purposes of developing its own financial plans, the Postal Service needs an interpretation of that rule (or any other applicable  rules) upon which the Postal Service can rely if it were to begin preparation of the requisite documentation for CPI-U rate adjustment," German wrote.

The postal-reform law and the PRCs regulations interpreting that law are clear when things go as envisioned, with the USPS seeking rate increases once a year based on increases in the CPI-U. But no one seemed to anticipate the Consumer Price Index decreasing, which is what it did in 2009 primarily as a result of rapidly declining fuel prices. There was no provision in the law requiring the Postal Service to decrease rates as a result of that deflation and no guidance regarding the baseline period for future rate-cap calculations.

Postal Rate Cap Finishes Year in the Red

It’s official: The U.S. Postal Service will not be able to carry out the usual May increase in First Class, Standard, and Periodicals rates this year. And there may be a bit of good news for mailers next year as well.

With today’s release of the December Consumer Price Index (CPI), the Postal Service’s annual rate cap for the “market-dominant” classes is -0.36%. That's because lower gasoline prices and the economic recession caused the average monthly CPI in 2009 to be below 2008's average.

The law and regulations governing the CPI-based rate cap do not seem to anticipate such deflation. There is certainly nothing that requires the USPS to reduce rates by -0.36% even though the CPI declined. (Nor will there apparently be pay cuts for postal workers whose unions have cost-of-living adjustments in their labor contracts.)

What is not as clear is how the rate cap for 2011 will be calculated. Most likely it will be a matter of comparing this year’s CPI to 2008’s, not the lower 2009 number. That means that a steady annualized inflation rate of 3% this year would yield only a 1.9% rate cap for 2011, and a 5% inflation rate would mean only a 3.0% rate cap.

Under special circumstances, the Postal Service can institute "exigent" rate increases that violate the price cap. Postmaster General Jack Potter says he won't propose those this year, but the Postal Service's budget deficit might increase pressure for such emergency increases.

Related articles:

• Why Potter Is Freezing Postal Rates, And What It Means For 2010: Potter announced a 2010 price freeze for most classes of mail back in October.
• Can the Postal Service Still Afford Periodicals?  Why the Postal Service is like an airline with half-full planes.
• Will Postal Rates Decrease Next Year?  Laws and regulations governing the Postal Service ignored the possibility of deflation.
  

Why Potter Is Freezing Postal Rates, And What It Means For 2010

Postmaster General Jack Potter tried to restore mailers' confidence in the U.S. Postal Service today by announcing a price freeze for most postal rates in 2010.

"The Postal Service will not increase prices for market dominant products in calendar year 2010," Potter said in a statement sent to various customer groups late this afternoon. He was responding to "pessimistic speculation" that rates might increase as much as 10%.

"There will be no exigent price increase for these products," which include First Class, Standard, and Periodicals, he said.

"While increasing prices might have generated revenue for the Postal Service in the short term, the long-term effect could drive additional mail out of the system. We want mailers to continue to invest in mail to grow their business, communicate with valued customers, and maintain a strong presence in the marketplace."

Earlier in the day, the release of the Consumer Price Index virtually confirmed what had become increasingly clear in recent months -- that USPS will not be able to impose the usual inflation-based rate increases next year. Consumer prices have declined so much since 2008 that they will end the year in negative territory unless the Fourth Quarter annualized inflation rate exceeds 9%.

Mailers feared USPS would try to close its budget gap -- probably $3 billion for the fiscal year just ended, or $7 billion if you count Congress' "forgiveness" of a bogus retirement-health payment -- by seeking exigent (emergency) rate increases.

Potter's statement did not clarify whether he was referring to all market-dominant rates or to the average rates for each class. Postal officials have subsequently put out the word that "no increase means no increase," meaning that no rates in the market-dominant classes will change.

But Potter's statement made clear that he understands the two dangers of an exigent rate increase:

1) In the short run, higher rates would suppress mail volume, but, as explained last week in Potter Doesn't Want to Hike Postage Rates in 2010, savings from such volume reduction would be minimal. The combination of lost business and slim cost savings could wipe out any gains from the higher prices per mail piece.

2) An exigent rate increase would signal to mailers that the Postal Service is unreliable and that they can no longer count on rate increases being capped by inflation. One exigent rate increase would lead to expectations of more in the future. That would accelerate mailers' efforts to replace mail with cheaper electronic substitutes -- for example, customer incentives for on-line bill payment.

So how does Potter intend to close the budget gap? He's been making numerous speeches and giving interviews touting elimination of Saturday delivery, which would save up to $3 billion annually, as one option. That would result in elimination of about 40,000 career employees positions, which could be done "through attrition because we have a lot of folks right now who are eligible to retire and who we could incent to retire,” Potter said last week in a radio interview.

Continued downsizing is clearly in the cards. Just last week, USPS announced possible consolidation of nine more processing and distribution centers. Nearly 40 such Area Mail Processing studies are in the works, along with the possible closing of hundreds of post offices.

Postal officials are looking into new revenue streams, and Potter's statement today mentioned that they want "to grow the mail through innovative incentives like the Summer Sale and contract pricing."

And, inevitably, the issue of the retiree-benefits shell game will be on the table. Officially, it's called a pre-payment of retiree health benefits, but in actuality Congress is forcing USPS to overfund a benefits account by more than $5 billion annually in a way that makes the federal deficit look smaller. Without those payments from the supposedly independent and off-budget Postal Service, USPS would have been profitable until fiscal year 2009.

Congress may end up facing a choice between ending that accounting game and allowing the Postal Service to eliminate Saturday delivery. Or the Postal Service could do an end run around Congress and end Saturday delivery on its own, as explained in How USPS Could Bypass Congress on Saturday Delivery.

Potter Doesn't Want to Hike Postage Rates in 2010

Postmaster General Jack Potter has been telling mailers’ groups in recent days that he does not plan to raise postal rates next year, a reliable source tells Dead Tree Edition.

Worried that price increases would backfire and cause mail volumes to drop further, Potter is telling mailers that any increase in 2010 would be “very small,” the source says. Mailers are interpreting that as at most 2% to 3%, which would mean a one-cent increase in the price of the First Class stamp.

In a question-and-answer session today at the National Press Club, Potter said a decision about rate increases would not be made until after the first of the year and noted that such increases can be counterproductive if they reduce volume. He also hinted in a radio interview Tuesday that "exigent" (emergency) rate increases were not in the plans.

"If you think about the price of a First Class stamp being capped at the rate of inflation, you can do your own math," Potter said on The Diane Rehm Show. "Figure out what inflation will be between now and whatever date you pick and that's likely to be where the price of a stamp will be."

By law, USPS can increase rates for most mail classes each May by the previous year’s average change in the monthly Consumer Price Index. But with the CPI still below where it was a year ago, USPS has almost no chance of being able to institute such inflation-based price increases next year. (The annualized inflation rate for the rest of this year would have to be about 6% for USPS to get any inflation-based price increases in 2010.)

That has led to fears that the Postal Service would institute exigent rate increases to close its budget gap, which Potter said today was more than $3 billion in the fiscal year that ended Sept. 30.

“Without a big change in the way we’re required to do business, we’re likely looking at a deficit of more than $5 billion – for years to come,” Potter told the National Press Club today. Among the possible changes he mentioned were five-day delivery, reducing costs, ending the pre-funding of retiree health benefits, entering new businesses, and government subsidies. But not price increases.

Increasing postage rates by about 7% would close the $5 billion gap -- if it didn't hurt mail volume. But large rate increases in recent years, such as one for lightweight catalogs, have caused mailers to shift marketing money away from mail to less expensive digital formats like email and Web marketing.

Even a small exigent rate increase could undermine confidence in the Postal Service, thereby hastening that exodus from mail. And because most of the Postal Service's costs are fixed regardless of volume, less mail hurts USPS revenues far more than it reduces costs.

For more information, please see:

• Deflation Will Keep Postal Rates In Check -- Maybe: How declining costs in the economy as a whole are hindering USPS's ability to raise prices.
  
• Postal Officials Ponder Emergency Rate Increases: More information on exigency-based rate increases.
• USPS Playing "Let's Make A Deal": Why special price discounts like the Summer Sale are profitable for the Postal Service
  
• Can the Postal Service Still Afford Periodicals?: Even low-priced mail is profitable at the margin for USPS.
  

Deflation Will Keep Postal Rates In Check -- Maybe

Unless inflation suddenly rears its head in the next few months, any increases in U.S. postal rates next year would have to be by emergency request rather than being based on inflation.

Inflation would have to rise at an annualized rate of 5% during the final five months of the year for the Postal Service to have even the tiniest of price caps for rate increases in May. The inflation rate would have to spike to 15% for the rest of this year for the price cap to rise by just 1%.

The Department of Labor announced Friday that the Consumer Price Index decreased 0.2% (1.9% on an annualized basis) in July. The Postal Service’s authority to implement normal annual rate increases for most mail – including First Class, Standard, and Periodicals – next May is limited to average changes in the monthly CPI this year versus the same month in 2008. The July CPI was down more than 2% from July 2008, when energy prices peaked.

These, of course, are not normal times for the Postal Service, which is losing billions of dollars and is even talking about running out of money this year. That’s why, as Dead Tree Edition revealed last month, postal officials are considering relatively small “exigency-based” (emergency) rate increases next year in place of the usual inflation-based increases.

Two weeks after that article was published, Postmaster General Jack Potter acknowledged at a news conference that "a modest adjustment in prices" was possible in the spring.

Postal Officials Ponder Emergency Rate Increases

Postal officials are spreading the word that they may seek emergency rate increases next year.

Various scenarios have been bandied about, including one that would raise the price of the 44-cent First Class stamp to 50 cents and other rates by similar amounts. But after several meetings with postal officials, the Direct Marketing Association is telling some members that the Postal Service is more likely to seek an "exigent increase" of only 2% to 3%, including only one cent for the First Class stamp, to help shrink its multi-billion-dollar losses.

Annual increases in most postage rates are generally capped by changes in inflation. Postal officials are realizing that deflation, especially the drop in energy prices since last summer, will probably mean no such rate increases next year, according to accounts coming out of meetings with postal officials. As Dead Tree Edition pointed out recently, USPS will not be able to institute normal rate increases in May 2011 unless the Consumer Price Index rises at an annualized rate of nearly 5% for the rest of this year.

That's why postal officials are pondering an unprecedented "exigency-based" rate adjustment, which postal regulations allow "only when justified by exceptional or extraordinary circumstances." Postal Regulatory Commission rules would also require USPS to discuss the circumstances leading to the proposed increases and "whether the circumstances were foreseeable or could have been avoided by reasonable prior action."

The PRC would hold a public hearing on an exigent rate request and by law would have 90 days to decide whether "such adjustment is reasonable and equitable and necessary to enable the Postal Service, under best practices of honest, efficient, and economical management, to maintain" appropriate service levels.

The Postal Service, which is supposed to break even, is projecting a loss of about $6 billion this fiscal year. To close that gap, which USPS says will grow unless it takes drastic action, postal officials are also discussing plans with mailer groups and postal unions to transition to five-day delivery in the fiscal year that starts in October 2010. That would require Congressional approval.

The closing of thousands of post offices is a possibility, the consolidation of processing and distribution centers has recently accelerated, and USPS continues to shrink its workforce -- all in response to declining mail volume that is causing the budget shortfall.

The meetings have also been an attempt by postal officials to shore up union and customer support for legislation that would reduce USPS' unusually high pre-payments for retiree health care. The Congressional Budget Office estimates H.R. 22 would save USPS about $2.5 billion annually for the next three years.

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.

Postal costs to go up less than 4% -- maybe

So now it’s official: If you use Periodicals, Standard, or First Class postage, your mailing costs will rise by just under 4% in May, right?

That’s not a safe bet. It’s true that the average change in rates for those “market-dominant” classes will be 3.976% for Periodicals, 3. 862% for Standard, and 3.814% for First Class. That’s based on the announcement today that the average monthly Consumer Price Index in 2008 rose by 3.8% over 2007, plus a smidgen of “unused rate authority” from last year’s rate increases. (See “Who’s it gonna be, me or the PRC” for a further discussion of how the rate cap is determined -- and Dead Tree Edition’s prediction that the rate cap would be below 4%. Nyah, nyah, told you so!)

With last year’s rate increases, all mailers in the market-dominant classes got virtually identical increases in costs. But don’t count on that happening this time around. Here are factors that could cause some mailers to get large increases and perhaps help others decrease their postage costs:

• A little gift from the Postal Service: USPS is undertaking a massive consolidation of carrier-route boundaries early this year, though it's unclear how many fewer routes there will be. Here’s how these consolidations will help mailers: Suppose your Periodicals-class publication has five copies going to one carrier route and four going to another and that the two routes are merged: Now those copies will move from a 5-digit bundle to a carrier-route bundle, saving you at least 10 cents per copy. The biggest benefit will probably go to Periodicals mailers that already have 25% to 75% of their pieces in carrier-route bundles. For those mailers, a 10% decrease in the number of carrier routes could boost their carrier-route sortation by 5 percentage points, yielding savings of about a half-cent per piece -- typically 1% to 2% of total postage. The savings would be lower for Standard mailers because their carrier-route incentives are smaller.
  


• What the Postal Service giveth, the Postal Service can taketh away: Here’s a scary thought for Periodicals mailers, especially for those benefiting the most from the consolidation of carrier routes: There is apparently nothing in the new postal law preventing the Postal Service from increasing the minimum number of pieces in a carrier-route bundle. To get the money-losing Periodicals class closer to breaking even, USPS might increase the minimum size of a carrier-route bundle from six pieces to 10 to bring it into line with Standard flats, one industry expert speculated. That would increase some mailers’ costs by two cents per copy.
  


• Be careful what you wish for: Efficient Periodicals mailers, led by Time Inc., tried for years to have the Postal Service’s transportation costs fully reflected in Periodicals rates, instead of having dropshipped publications subsidizing non-dropshipped publications. The Postal Service resisted that approach as unfair to small publications. (Not true. It only hurts the small publications that mail nationwide on their own rather than in freight pools.) The resulting Periodicals rates are a patched-together Frankenstein’s monster that no one likes – and that decreased many publishers incentives to dropship. Time Inc. advocated BMC discounts, which would have especially helped small publications, but the BMC discount that ended up in Periodicals rates is virtually meaningless. USPS officials reportedly recognize that the lack of dropship incentives for publishers has caused them to scale back dropshipping, thereby increasing the Postal Service’s costs.
  


• Sacks suck: Also in the category of the Postal Service being careful what it asks for is the matter of Periodicals sacks. Time Inc. and the other advocates of cost-based Periodicals rates proposed that USPS’s full costs of handling sacks be reflected in Periodicals rates, rather than having palletized publications subsidizing sacked publications. Again, USPS resisted, so the resulting rates have publishers bearing only a small portion of the Periodicals sack-handling costs. With the Postal Service in the red and realizing more than ever what a pain in the P&DC sacks are, cost-based rates are looking much more attractive to postal officials. Look for the new rates to be less accommodating to inefficient Periodicals mail. And don’t be surprised if Standard mailers start getting charged for sacks as well.
  


• Squishing the flats: Postal officials reportedly realize that the huge 2006 rate increases for Standard flats (which are mostly catalogs) have contributed to a rapid decline in volume. Especially hard hit were the kind of lightweight catalogs typically used for prospecting. (Dead Tree Edition pointed out a cheaper alternative for catalog prospecting, but Google Analytics tells me the article wasn’t exactly a big hit – even though L.L Bean continues to use the method.) The Postal Service may charge Standard letters (direct mail) a larger-than-average increase so that it can give lightweight Standard flats a break.
  


• Death of the SCF: The Postal Service’s efforts to consolidate its dropship network has been quiet for a few months, but roll-out of the Flats Sequencing System and cost pressures will ensure that more locations get consolidated. Such consolidations make it easier for mailers to increase their dropship discounts without spending more on freight.
  
  Here’s a little suggestion for postal officials trying to tweak the Periodicals rate structure. (I know they’re reading Dead Tree Edition at L’Enfant Plaza because sources tell me that postal officials have been complaining about my recent Intelligent Mail barcode post, though none have had the cahones to issue a written rebuttal.) Create meaningful BMC discounts for Periodicals to entice small mailers to start dropshipping and large mailers to do more dropshipping. There are reasons not to put Periodicals into bulk mail centers, but there is a way around that: Designate certain large ADCs as “Periodicals BMCs.” For example, make the Pittsburgh P&DC a Periodicals BMC and assign it the ZIP codes served by the Pittsburgh Bulk Mail Center; then watch as Periodicals mailers ship publications for the tiny, hard-to-reach Clarksburg, WV ADC to Pittsburgh (as Standard mailers already do) instead of mailing them from printing plants halfway across the country.

Who's it gonna be, me or the PRC?

Who is right about next year’s increase in postal rates, the Postal Regulatory Commission or Dead Tree Edition?

The PRC updated a chart yesterday suggesting that next year’s rate increases will be capped at 4.2%, while here at "The Tree" we predicted it would be in the 3.7% to 3.9% range. If you’re budgeting for next year, shouldn’t you go with the official number, rather than one developed by a guy who once predicted that “The Simpsons”, though brilliant and funny, was too weird to catch on with the American public?

Not so fast. Both PRC and “the Tree” are correct.

The PRC chart is not a prediction but a straight calculation. What it shows is that from November 2007 to November 2008, the average monthly increase in the relevant Consumer Price Index (CPI-U) has been 4.2%. But it’s the change from December 2007 to December 2008, rounded to the nearest tenth of a percent, that will determine the rate cap.

The PRC, probably wisely, makes no attempt to project what will happen to CPI in December. Going where bureaucrats fear to tread, Dead Tree Edition’s position is that, because of recent deflation (a 3.5% drop in CPI-U from July to November), the December-to-December number will be lower than 4.2%.

Specifically, consumer prices would have to rise about at least 2.6% in December (an annualized rate of 36%) for the cap to end up at 4.2%. With energy prices continuing to drop and the economy still circling the drain, that ain’t happenin’.

Even if December bucks the recent trend and the CPI-U doesn’t change, the cap would be 3.9%. If prices drop about 1%, the cap would be 3.8%, and a drop of much more than 2% would put it at 3.7%. Here are the relevant CPI-U numbers if you want to check my math:

YEAR	2007	2008
Jan	202.416	211.080
Feb.	203.499	211.693
March	205.352	213.528
April	206.686	214.823
May	207.949	216.632
June	208.352	218.815
July	208.299	219.964
Aug	207.917	219.086
Sept	208.490	218.783
Oct	208.936	216.573
Nov	210.177	212.425
Dec	210.036	?
Ave.	207.342	215.764

A final note: The Postal Service also has a tiny bit of "unused rate authority" left over from this year's rate change. The cap was 2.9%, but the average Periodicals increase was only 2.724%, so USPS has an extra 0.176% it could use for Periodicals. That means if the cap ends up at 3.9%, the Postal Service could actually increase average Periodicals rates by up to 4.076%. Standard's unused rate authority is only 0.025%, and the number for First Class is 0.014%.

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.

A Second Look at Postal Hikes

After further study of the issue, I will amend yesterday's prediction regarding next year's postal rates -- and point out a quirk in postal regulations.

I still think next year's rate increase will be below the 5% recently predicted by the chairman of the Postal Regulatory Commission, but I was wrong on one count: If prices remain flat in November and December, the increase would be about 4.3%, not the 3.1% increase I stated yesterday. But I still think the increase will be less than 4% because consumer prices are decreasing.

The amount of the increase in most postal rates will be determined by the change in the average monthly Consumer Price Index for 2008 versus 2007. (I mistakenly understood the increase to be based on the change in CPI from December 2007 to December 2008.)

The CPI has decreased in each of the last three months, including a record 1.0% percent decrease in October. But you ain't seen nothin' yet. With most other prices basically being flat, virtually all of the October decrease was related to energy -- especially the 15% drop in gasoline prices. Gasoline prices have dropped even more precipitously in November -- down 35% from Oct 13 to Nov. 17, according to the Department of Energy -- and are apparently heading even lower. November seems likely to break October's record for a CPI decrease, and the December CPI may be lower still.

A 2.0% drop in November followed by a 1.5% decline in November would yield a rate cap of 3.8% for next year's increases in prices for such classes of mail as Periodicals, Standard, and First Class. It would also make any 2010 increases unlikely: Even if those big drops were followed in 2009 by annualized monthly increases of 5% in the CPI, the average monthly CPI in 2009 would be lower than in 2008 because of the energy-related spikes in CPI this past spring and summer. (Remember a few months ago when the big economic concern was inflation?)

That brings me to the quirk: Although the Postal Service can raise rates each year in accordance with changes to the CPI, there doesn't seem to be anything in the regulations requiring it to decrease prices when the change in CPI is negative. The PRC regulations refer to an "inflation-based" limitation on price adjustments but not to any required deflation-related adjustment to prices.

Smaller Postal Hikes?

Please see the Nov. 20 follow-up that corrected an inaccuracy in this post and provided further insight.

Now that the rate of inflation has turned negative, postal rates seem likely to increase only 3%, and perhaps less, next year.

The Consumer Price Index decreased 1.0% in October, continuing a recent pattern of price deflation, the Department of Labor announced today. Even if prices remain flat in November and December, the index would be up only 3.1% for the year.

The U.S. Postal Service is scheduled to announce new prices in February for most classes of mail, such as Periodicals, Standard, and First Class. By law, each class's average price increase, which will take effect in May, is largely limited to the change in CPI from December 2007 to December 2008. As Dead Tree Edition has previously reported, Periodicals may get an additional increase if it is determined that the Postal Service is losing money on the class.

Just three weeks ago, the chairman of the Postal Regulatory Commission was quoted as predicting the increases would be about 5%.