SARS‐CoV‐2 infection causes broad‐spectrum immunopathological disease, exacerbated by inflammatory co‐morbidities. A better understanding of mechanisms underpinning virus‐associated inflammation is required to develop effective therapeutics. Here we discover that SARS‐CoV‐2 replicates rapidly in lung epithelial cells despite triggering a robust innate immune response through activation of cytoplasmic RNA‐sensors RIG‐I and MDA5. The inflammatory mediators produced during epithelial cell infection can stimulate primary human macrophages to enhance cytokine production and drive cellular activation. Critically, this can be limited by abrogating RNA sensing, or by inhibiting downstream signalling pathways. SARS‐CoV‐2 further exacerbates the local inflammatory environment when macrophages or epithelial cells are primed with exogenous inflammatory stimuli. We propose that RNA sensing of SARS‐CoV‐2 in lung epithelium is a key driver of inflammation, the extent of which is influenced by the inflammatory state of the local environment, and that specific inhibition of innate immune pathways may beneficially mitigate inflammation‐associated COVID‐19.