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.
Showing posts with label deflation. Show all posts
Showing posts with label deflation. Show all posts
Thursday, July 23, 2009
Monday, July 13, 2009
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:
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.
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%.
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.
Tuesday, December 16, 2008
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.
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.
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