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 fatty acid with 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 NLRP3-PYCARD inflammasome, causing caspase-1, IL-1β, and IL-18 production. This involves mitochondrial reactive oxygen species and the AMP-activated protein kinase and 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 via TNF-independent and dependent pathways. These findings provide insights into the association of inflammation, diet and T2D.