In response to infection, naïve CD8+ T (TN) cells yield a large pool of short-lived terminal effector (TTE) cells that eliminate infected host cells. In parallel, a minor population of stem cell-like central memory (TCM) cells forms, which has the capacity to maintain immunity after pathogen clearance. It has remained uncertain whether stem-like TCM cells arise by dedifferentiation from a subset of cytolytic TTE cells or whether priming generates stem-like cells capable of seeding the TCM compartment and, if so, when cytolytic TTE cells branch off. Here, we show that CD8+ T cells with stem-like properties, which are identified by the expression of TCF1 (encoded by Tcf7), are present across the primary response to infection. Priming programs TN cells to undergo multiple cell divisions, over the course of which TCF1 expression is maintained. These TCF1+ cells further expand relatively independently of systemic inflammation, antigen dose, or affinity, and they quantitatively yield TCF1+ TCM cells after pathogen clearance. Inflammatory signals suppress TCF1 expression in early divided TCF1+ cells. TCF1 down-regulation is associated with the irreversible loss of self-renewal capacity and the silencing of stem/memory genes, which precedes the stable acquisition of a TTE state. TCF1 expression restrains cell cycling, explaining in part the limited expansion of TCF1+ relative to TCF1- cells during the primary response. Thus, our data are consistent with terminal differentiation of effector cells being a step-wise process that is initiated by inflammation in primed stem-like cells, which would otherwise become central memory cells by default.