Tuesday, February 27, 2007

Fixed-price stamps headed our way

Elvis Stamps
Originally uploaded by The Real Ferg.
Seems the USPS is moving closer to creating a fixed-price stamp... a stamp that will always send a first class letter, no matter how much the rate goes up.

From Bill Brubaker and Christopher Lee at the Washington Post:
The Postal Regulatory Commission today recommended a new way of buying stamps -- locking in a rate to mail a first-class letter, much like home buyers snag a good rate on a 30-year mortgage.

Under the plan, the first forever stamp would cost 41 cents -- the result of a two-cent rate hike also proposed by the independent commission today. The commission trumpeted the hike as a victory for consumers because the Postal Service had wanted a three-cent jump.
But is this really a good deal? At first blush, I thought it was. Hey, buy hundreds of stamps and use them in a decade, right? Good deal...

Or is it?

Trent over at The Simple Dollar has it all worked out. And the answer may surprise you.

Trent starts out by noting,
Before we dig into the calculations, it should be noted that in general this increases the flexibility for consumers without raising prices, so by default it is a good deal for consumers - anything that makes a product better without increasing prices is a good thing.
But how about financially? Turns out it's a good deal... in the short term. Trent has a great graph that really shows what's going on, but here it is in words:
Can you really gain a lot by stocking up on stamps before a rate increase? The only way to really tell is by looking at the recent history of stamp price increases....

It turns out that the rate of postage stamp increase is amazingly close to the rate of inflation in recent years. This is because that postage stamps are hedged to match inflation, as the postal service isn’t out to make a profit, but to break even.

However, there is one big difference: inflation is fairly steady, but the postal service jumps regularly. This means that if you buy a bunch of stamps just before a jump (even a year’s supply of them), you can beat inflation by quite a bit with your postage stamp purchase....

(Check out the graph here.)

As you can see, they match reasonably well, but something else should stick out at you: stamps were at their biggest bargain just before the rates went up.

In other words, when the “forever” stamp goes into effect, buying a bunch of stamps just before a rate increase is a very effective way to save money. You can easily outpace inflation with this “investment” and even outpace a lot of other investments, including money market accounts. Of course, over a longer period of time (a period of two stamp rate increases or more), the price increases begin to match inflation, and that’s not a good investment.

To summarize: I plan on buying a few hundred “forever” stamps just before the next rate hike, but not more than I could use in a year. This lets me maximize the benefit of beating a rate hike, but doesn’t lock me into an “investment” that merely stays the same as inflation.
So, there's the answer: inflation makes any long-term savings a non-starter.

And I learn something every day.

And who said my RSS reading was a waste of time?

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