Chronic obstructive pulmonary disease (COPD) is characterized by a persistent inflammatory state in the lungs and defective tissue repair. Although the inflammatory response in patients with COPD is well characterized and known to be exaggerated during exacerbations, its contribution to lung injury and abnormal repair is still unclear. In this study, we aimed to investigate how the inflammatory microenvironment affects the epithelial progenitors and their supporting mesenchymal niche cells involved in tissue repair of the distal lung. We focused on IL-1β, a key inflammatory mediator that is increased during exacerbations of COPD, and used an organoid model of lung epithelial cells and fibroblasts to assess the effect of IL-1β treatment on these cells' transcriptome and secreted factors. Whereas direct treatment of the lung organoids with IL-1β promoted organoid growth, this switched toward inhibition when it was added as fibroblast pretreatment followed by organoid treatment. We then investigated the IL-1β-driven mechanisms in the fibroblasts and found an inflammatory response related to (C-X-C motif) ligand (CXCL) chemokines; we confirmed that these chemokines were responsible for the impaired organoid growth and found that targeting their C-X-C chemokine receptors 1/2 (CXCR1/2) receptors or the IL-1β intracellular signaling reduced the proinflammatory response and restored organoid growth. These data demonstrate that IL-1β alters the fibroblasts' state by promoting a distinct inflammatory response, switching their supportive function on epithelial progenitors toward an inhibitory one in an organoid assay. These results imply that chronic inflammation functions as a shift toward inhibition of repair, thereby contributing to chronic inflammatory diseases like COPD.