USPS OIG White Paper: Examining Alternative Inflation Indices for Regulating Market Dominant Price Increases

The Postal Accountability and Enhancement Act capped price increases for Market Dominant products (such as First-Class Mail) at the rate of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U). The OIG examined the potential impact on USPS’s price authority, revenue, and inflation cost coverage if, since fiscal year (FY) 2011, the price cap had been based on six alternative inflation indices instead of the CPI-U.

These indices are: Chained CPI-U (C-CPI-U), Personal Consumption Expenditures Price Index (PCE PI), Producer Price Index-Final Demand (PPI FD), Employment Cost Index (ECI), Gross Domestic Product Price Index (GDP PI), and CPI-Delivery Services (CPI-DS).

Impact on price authority: Between FYs 2011 and 2022, price caps based on the C-CPI-U, the PCE PI and GDP PI would have resulted in lower cumulative rate authority than the CPI-U, while price caps based on the ECI and PPI FD would have allowed slightly higher authority. The CPI-DS is a stark outlier, as it would have allowed the Postal Service to raise its rates by over twice as much as the CPI-U.

Impact on revenue and coverage of postal cost inflation: Four of the six indices would have allowed, on average, slightly lower revenue and lower cost coverage than the authority yielded by the CPI-U. The ECI would have provided higher revenue and better cost coverage than CPI-U. In fact, the ECI would have come closest to matching postal cost inflation but would have still lagged it by an average of 0.4 percent a year. Our revenue impact figures for CPI-DS are illustrative, as we chose not to factor in price elasticities.

Foreign postal regulators use their national CPI as a main component of the price cap, generally in combination with other authorities. In these countries, the debate is about the other authorities, rather than the merits of the CPI.