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Time to End the CPI Cap for Postage Rate Increases

Posted by Mark Fallon on Mar 28, 2017 5:00:00 AM

Stamp.jpgUnder the requirements of the Postage Accountability and Enhancement Act (PAEA) of 2006, the Postal Regulatory Commission (PRC) is reviewing the way the United States Postal Service (USPS) sets postage rates. Under the PAEA, the USPS can’t raise postage rates for market dominant products above the rate of inflation as determined by the Consumer Price Index (CPI). The price cap was a bad idea in 2006, remains a bad idea in 2017, and should be ended by the PRC.

Market dominant products are the types of products most people think about if you use the word “mail”. The category includes First-Class Mail, USPS Marketing Mail (formerly Standard Mail), Periodical Mail, Package Services, and special services like Certified Mail, Registered Mail, etc. These are products that are protected by the twin laws that provide a postal monopoly on the mailbox, along with the requirement of universal service to all addresses.

One of the stated reasons for the cap was that mailers don’t have a choice for these products. While companies like FedEx and UPS compete for overnight deliveries and small packages, only the USPS can deliver the market dominant products. A cap was needed to protect the mailers.

The CPI is a poor choice for an index for postage rates. First, the CPI is based on a basket of good used by consumers – food, fuel, electricity, vehicles (new and used), apparel, medical care, shelter and transportation services. During the 12 months ending in February 2017, the computed price increase for all items was 2.7% (source – Bureau of Labor Statistics - bls.gov).

However, during that same period the price index for gasoline rose 30.7%. The USPS has over 200,000 vehicles moving mail every day. The price of gas has a far greater impact on the operational costs of the USPS than the stable price of food.

Also, most postage isn’t paid by consumers, it’s paid by companies. Less than 28% of the USPS’s $68 billion revenue is derived from their retail operations, and less than 21% of the over 200 billion pieces of mail was single-piece. Most mail is created by companies and sent to their customers and subscribers.

Opponents to lifting the cap are raising the tired “death spiral” refrain heard so often in the past. “If rates go up, companies will mail less or switch to e-mail.” Poppycock. In the past, there’s never been a significant drop in mail volumes after a rate increase. Drops in mail volumes are either due to larger economic issues or technological shifts.

The diversion of physical mail to electronic communication is real – but it’s not tied to postage rates. The majority of consumers – of all ages – still prefer to receive a physical mail piece. Companies often see considerable savings when they launch an electronic option, but after the first wave of adoption, the pace of change slows significantly. For the last 5 years, the volumes of commercial, presorted First-Class Mail have dropped less than 1% a year.

Lifting the cap doesn’t give the USPS a free-hand in setting rates. Any proposed increase must be approved by the PRC – and that isn’t a rubber stamp. Also, the USPS leadership, including Postmaster General Brennan, want to grow the business of mail. Drastic increases won’t help them reach that goal.

The USPS has worked hard to increase efficiencies, and more work still needs to be done. However, hampered by a Congress that can’t pass meaningful postal reform, even those efforts are limited. At the same time, aging delivery vehicles and other equipment need to be replaced.

Creating a stronger USPS for the future means giving them a stronger financial footing. Ending the CPI cap is the first step in the right direction.

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