Be Careful What You Wish For

May 8, 2019

A Postmaster General, a union leader, and a regulator all walk into a bar.  What do they have in common?  Megan Brennan, Frederic Rolando, and Robert Taub all have said many times that a key to fixing the financial problems and long-term future of USPS is increasing rates faster than the CPI cap.

As they know, the law of demand says that as the price of a good or service rises, the demand for that good or service declines.  Their belief is that the revenue increase will out-weigh the volume decline cause by higher rates.  In other words, USPS will have more revenue even after the volume inevitably declines.  Put another way, the postal downward sloping demand curve is closer to flat than steep.

Historical data is said to back that up.  On average since postal reorganization in 1970, USPS monopoly mail price elasticity has been low.  But there are two key reason that this historical data would not hold up in today’s new normal.

First, the data is based on a 48-year period in which postal mailing price increases on average did not exceed the CPI.  If we were to introduce rate increases regularly exceeding the general rate of inflation, the demand curve would steepen, and volume would react to a greater degree that it has during CPI-limited increases.

Second, the demand curve already is steeper in today’s economy.  Budgets are tighter than they used to be, and alternatives to mail are abundant.   The PMG, union leader, and regulator have said that the USPS monopoly is no longer strong.  That means price elasticity already is higher.

We often point out that nonprofits mailing one-tenth of total volume are constrained by annual budgets on non-program spending.  Nonprofits are subject to ratings by outside agencies emphasizing the percentage spent on non-programs.  Above-inflation postage increases inevitably will cause comparable reductions in nonprofit mail volume, as occurred during the 2014-16 above-CPI surcharge.  Making any portion permanent will reduce nonprofit volume indefinitely.

February 2019 was not good for the CPI-busting strategy.  It was the first full month after the CPI hike capped at 2.419 percent by the regulator.  The USPS tried to use the full cap to maximize its revenue.  It created variances with the classes, such as a ten percent increase in single-piece First Class and the third year in a row of double-inflation hikes in drop-shipped Marketing Mail letters.

February 2019 (unaudited) Market Dominant mail revenue dropped by 3.1 percent, as volume declined by 6.1 percent, in the first month after a 2.4 percent rate increase.   Yes, that is a small sample size.  But the evidence points to price sensitivity in a postal system that needs a critical mass of volume to fund the public service network.  Looking at the most recent three years’ reactions to late January CPI rate increases suggests that it bears watching going forward.  It does not look like mail is being moved up to January prior to the increases.  It also raises the question how the advocates of “pricing freedom” are so sure it will work.

Market Dominant Mail Volume & Revenue Changes Around CPI Rate Increases

Jan 17 vol -0.9%    rev -4.7%

Feb 17 vol -9.1%     rev -12.6% (2016 a leap year)

Mar 17 vol -1.6%    rev -5.7%


Jan 18 vol +1.0%    rev -2.1%

Feb 18 vol -1.0%     rev -0.8%

Mar 18 vol -6.8%    rev -4.7%


Jan 19 vol -2.8%     rev -1.0%

Feb 19 vol -6.1%      rev -3.1%


The PMG, union leader, and regulator should think twice before placing bets on the risky, unproven theory of larger price hikes to ensure the healthy future of our postal system.