High-fat diet (HFD) and inflammation are key contributors to insulin resistance and type 2 diabetes (T2D). Interleukin (IL)-1β plays a role in insulin resistance, yet how IL-1β is induced by the fatty acids in an HFD, and how this alters insulin signaling, is unclear. We show that the saturated fatty acid palmitate, but not unsaturated oleate, induces the activation of the NLRP3-ASC inflammasome, causing caspase-1, IL-1β and IL-18 production. This pathway involves mitochondrial reactive oxygen species and the AMP-activated protein kinase and unc-51–like kinase-1 (ULK1) autophagy signaling cascade. Inflammasome activation in hematopoietic cells impairs insulin signaling in several target tissues to reduce glucose tolerance and insulin sensitivity. Furthermore, IL-1β affects insulin sensitivity through tumor necrosis factor–independent and dependent pathways. These findings provide insights into the association of inflammation, diet and T2D.