Transforming synaptic input into action potential output is a fundamental function of neurons. The pattern of action potential output from principal cells of the mammalian hippocampus encodes spatial and nonspatial information, but the cellular and circuit mechanisms by which neurons transform their synaptic input into a given output are unknown. Using a combination of optical activation and cell type-specific pharmacogenetic silencing in vitro, we found that dendritic inhibition is the primary regulator of input-output transformations in mouse hippocampal CA1 pyramidal cells, and acts by gating the dendritic electrogenesis driving burst spiking. Dendrite-targeting interneurons are themselves modulated by interneurons targeting pyramidal cell somata, providing a synaptic substrate for tuning pyramidal cell output through interactions in the local inhibitory network. These results provide evidence for a division of labor in cortical circuits, where distinct computational functions are implemented by subtypes of local inhibitory neurons.