Evidence in support of the concept of local pancreatic islet inflammation as a mechanism of beta cell failure in type 2 diabetes is accumulating. Observations in human islets from type 2 diabetic patients and rodent models of the disease indicate the increased presence of IL-1 driven cytokines and chemokines in pancreatic islets, concomitant with immune cell infiltration. Inflammation is the body's protective response to harmful stimuli and tissue damage. However, under chronic stress (e.g. metabolic stress in obesity and type 2 diabetes) the body's own defensive response may become deleterious to tissue function. Here, we summarize the current evidence that islet inflammation is a feature of type 2 diabetes, and discuss its role with respect to alpha and beta cell compensation and eventual beta cell failure.