In a traditional command economy, prices function as political instruments rather than as natural market regulators that respond to supply and demand. Central authorities set producer and consumer prices, which bear little relationship to each other and often remain fixed for many years. Producer prices are those prices that enterprises pay for goods. Planners use producer prices to facilitate target-setting and to determine plan fulfillment. Consumer prices for all items except housing, foodstuffs, and other basic necessities are set at artificially high levels to avoid open inflation. Consumer prices for essential goods are supposed to be set at market-clearing levels, but actual retail prices are often lower, causing persistent shortages and forced savings. Prices for imports and exports are based on current world market prices in trade with the West and on an average of past world market prices for trade with the Comecon countries.
In 1968 the NEM gave enterprises more flexibility to set prices and permitted market forces to influence prices. Subsequent price reforms created a direct link between world market prices and Hungarian producer prices for most items. The government, however, could not allow prices to float freely because key enterprises faced little domestic or import competition and could dictate the prices of essential items in an unrestricted market. Decades of arbitrary price, wage, tax, and subsidy policies also have left many imbalances in the economy that would cause significant dislocations if the authorities arbitrarily introduced a free market in one stroke.
In 1980 the authorities introduced a so-called "competitive price system" for industrial producer prices. The system was designed to simulate what domestic prices would be if enterprises faced significant market competition. The government assigned each enterprise to one of three groups according to a series of factors, including the amount of competition the enterprise faced in the domestic and foreign market. The different groups were subject to progressively less restrictive pricing rules; enterprises facing the stiffest competition were generally subject to the least restrictive rules. A 1984 reform gradually loosened administrative restrictions in order to permit market forces to guide the pricing decisions of a greater number of enterprises. In agriculture, the government set producer prices annually according to average production costs and other factors, and it used cost-plus pricing for most other sectors.
The NEM left consumer prices virtually untouched, and by 1976 the average of consumer prices had fallen below the average of producer prices. The authorities subsequently adjusted consumer prices in order to manage demand, wean enterprises away from reliance on government subsidies, and reestablish a buffer between producer and consumer prices. Over the course of the 1980s, the government attempted to let market forces influence a growing number of consumer prices.
Data as of September 1989