In the lung, alveolar type II cells behave as stem cells by regenerating alveolar type I cells after injury. However, underlying cellular and molecular mechanisms that awake the quiescent stem cells and orchestrate the regeneration process remain unclear. Here, we use single-cell RNA sequencing, in vivo lineage tracing, and ex vivo lung organoid co-cultures to define the functional impact of inflammatory niche on stem cell behaviours during regeneration process after injury.