Under injury conditions, dedicated stem cell populations govern tissue regeneration. However, the molecular mechanisms that induce stem cell regeneration and enable plasticity are poorly understood. Here, we investigate stem cell recovery in the context of the hair follicle to understand how two molecularly distinct stem cell populations are integrated. Utilizing diphtheria-toxin-mediated cell ablation of Lgr5⁺ (leucine-rich repeat-containing G-protein-coupled receptor 5) stem cells, we show that killing of Lgr5⁺ cells in mice abrogates hair regeneration but this is reversible. During recovery, CD34⁺ (CD34 antigen) stem cells activate inflammatory response programs and start dividing. Pharmacological attenuation of inflammation inhibits CD34⁺ cell proliferation. Subsequently, the Wnt pathway controls the recovery of Lgr5⁺ cells and inhibition of Wnt signalling prevents Lgr5⁺ cell and hair germ recovery. Thus, our study uncovers a compensatory relationship between two stem cell populations and the underlying molecular mechanisms that enable hair follicle regeneration.