We study the influence of financial frictions on the cyclical dynamics of producer prices. Empirical results show that the response of industry-specific PPI inflation to changes in aggregate financial conditions depends importantly on differences in the ease of access to external finance across industries: In industries in which firms face a high likelihood of financial constraints, inflation is insensitive to changes in financial conditions; in industries where firms have a relatively unfettered access to external finance, by contrast, inflation declines significantly in response to a tightening of financial conditions. Firm-level pricing behavior during the 2008 financial crisis confirms these general findings: Firms’ pre-crisis internal liquidity positions had a significanteffect on firms that increased their prices relative to their industry average during this period.On the theoretical side, we use the model developed by Gilchrist, Schoenle, Sim, and Zakrajˇsek (2015b ) to analyze the implications of the interaction between customer markets and financial frictions for economic outcomes. Using a version of the model calibrated to study normal business cycle conditions, we confirm their original findings that this interaction significantly attenuates the response of inflation to demand shocks and produces a strong negative comovement between inflation and output in response to financial shocks. In light of the latter result, we also explore the macroeconomic implication of different interest-rate policy rules. In response to financial shocks, rules that put a significant weight on inflation stabilization lead to noticeably worse economic outcomes than rules aimed at stabilizing output.