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Abstract The interfollicular epidermis (IFE) forms a water-tight barrier that is often disrupted in inflammatory skin diseases. During homeostasis, the IFE is replenished by stem cells in the basal layer that differentiate as they migrate toward the skin surface. Conventionally, IFE differentiation is thought to be stepwise as reflected in sharp boundaries between its basal, spinous, granular and cornified layers. The transcription factor GRHL3 regulates IFE differentiation by transcriptionally activating terminal differentiation genes. Here we use single cell RNA-seq to show that murine IFE differentiation is best described as a single step gradualistic process with a large number of transition cells between the basal and spinous layer. RNA-velocity analysis identifies a commitment point that separates the plastic basal and transition cell state from unidirectionally differentiating cells. We also show that in addition to promoting IFE terminal differentiation, GRHL3 is essential for suppressing epidermal stem cell expansion and the emergence of an abnormal stem cell state by suppressing Wnt signaling in stem cells.