Inflation is Alive and Well at the U.S. Postal Service

The US Postal Service today announced that it will raise postage rates yet again, this time to 46 cents for a first class stamp.  The rates will also rise for periodicals and parcels by 8% and 23% respectively.  This is the seventh rate increase in the last decade, as the cost of shipping a letter has increased by an average annual rate of 3.1% during that time.  According to our rough calculations, the rate increases have averaged about 70 basis points greater than CPI annually (annual CPI from 1999 to 2009: 2.2%, 3.4%, 2.8%, 1.6%, 2.3%, 2.7%, 3.4%, 3.2%, 2.8%, 3.8%, –.4%).  Put simply, the increasing cost of postage is only incenting consumers to look elsewhere for shipping.

The rate increase is part of a plan to lower the projected $7 billion budget shortfall that USPS expects to incur this year.  Costs have ballooned with retiree benefits, but the labor unions are likely too strong to allow any cut in those benefits.  Instead, the postal service anticipates the new heightened rates will increase revenue and shrink the deficit by $2.3 billion in its first nine months.  However, they blame the recent budget shortfall on shipping volume decreasing as much as 13% in this year alone.  USPS places blame on the slumping revenue on both the recession and the Internet (increased usage of online communication).

So, instead of cutting costs to better compete with evolving technologies, the USPS will further increase the cost of their service and likely lessen usage further.  We believe that any private-sector business faced with mounting losses year after year would couple any price increases with a reduction in costs.  There are many ways that the USPS could cut costs without a noticeable drop off in quality starting with ending Saturday delivery.  It is a convenience now, that I believe, people would not miss when it’s gone.

To increase costs and further decrease the attractiveness of your shipping method will not be a long term route to success.  The postal service should start looking for ways to cut costs and get creative because increasing prices only puts your shipping method at a further disadvantage to the many alternatives.  Perhaps United Parcel Service (UPS) and FedEx (FDX) will seize on an opportunity to grab even greater market share as the USPS toils under the weight of mounting costs?

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