The Postal Service’s Above Inflation Price Hikes

Inflation, which has reached levels not seen in decades, is dominating the news. Consumers are increasingly skittish as gas prices continue to rise and related news stories proliferate.

On July 10 mail prices will increase by an average of 6.5 percent. Increases for some mail products and services will be considerably greater. This after two similar increases last year. When rates go up in July, small businesses, commercial mailers, and many others will have experienced cumulative rate increases exceeding fifteen percent over an eighteen-month period. For mailers of flats, the increases are greater still; topping twenty percent in many cases.

As postage rates have generally tracked inflation for the last 50 years, this volatility is unprecedented. And unlike inflation generally, there are no self-correcting market forces; these increases are taking place as demand for postal services declines. Because postal rate changes are driven by regulation, relief will depend on regulatory change that has historically been slow to develop.

The Postal Reorganization Act of 1970 (PRA) created a cost-of-service regime which, coupled with consistently increasing mail volume, provided sufficient revenue for the Postal Service to break even as rates tracked closely to inflation over time. While that system worked, it was not without defects.

Rate cases were generally three years apart, so increases were lumpy. And because the rates were set by the Postal Rate Commission following lengthy litigation, the process was costly for all concerned and unpredictable. Under the PRA, rate cases took ten months, which greatly impaired the Postal Service’s ability to respond to changing conditions.

The remedy enacted in the 2006 Postal Accountability and Enhancement Act (PAEA) capped rates at the Consumer Price Index. This represented a tradeoff that, at the time, was considered an improvement. The Postal Service gained valuable flexibility and greater control over rates, subject to a price cap constraint that provided greater predictability for postal customers. In fact, price cap regulation is generally regarded as superior to cost-of-service regulation and is used effectively in many industries.

News reports on the July 10 rate increases often repeat the Postal Service’s argument now that the PAEA rate regime was defective. The reality is more complicated and illustrative of the limits of rate regulation.

Shortly after PAEA’s enactment, the US economy experienced the Great Recession. Mail volumes, which peaked in 2006, plummeted and remained in gradual decline. At the same time, the US entered a prolonged period of historically low inflation.

PAEA allowed for expanded rate authority in response to emergencies, and the Postal Service availed itself of an exigent rate increase. The law also required the Postal Regulatory Commission (PRC) to examine its own pricing regulations ten years after enactment. By then, the combination of declining volumes and constrained pricing were limiting USPS revenue growth.

When the PRC began its review of rate regulations in 2016, postal revenues were growing, thanks to the increase in e-commerce packages and the resiliency of mail. But because PAEA also included an onerous provision requiring aggressive prefunding of retiree health care benefits, the Postal Service was reporting chronic paper losses and rising long-term liabilities.

In response, the PRC granted the Postal Service, which has an absolute monopoly on the delivery of mail, significant rate authority over and above the PAEA price cap. One component of the rate authority is a “density adder” that further increases prices and rate volatility by rewarding the Postal Service with pricing leverage if volume declines, irrespective of the cause.

While the PRC could not have known that the era of low inflation was over, the results from changing its pricing regulations have been sadly predictable. In barely two years since their enactment, the Postal Service has announced multiple price increases and a significant reduction in mail service standards. Some postal customers must now manage four price changes per calendar year at considerable expense.

The Postmaster General is correct. The PAEA pricing model was imperfect. Any regulatory regime will exhibit defects. But the PAEA model protected mailers, small businesses, and others from monopolistic behavior and provided an incentive for cost containment.

The defects of the new model are easily identified and tilted squarely in favor of the monopoly. Their long-term effects will take some time to present, and if history is predictive of the future, mailers will have to hope they can hold out until the next defective model takes hold.

About the Author: Michael Plunkett is the President and Chief Executive Officer of the Association for Postal Commerce (PostCom).