Patients with myelodysplastic syndrome (MDS) harboring SRSF2 (serine and arginine rich splicing factor 2) mutations exhibit poor prognosis and aberrant inflammatory activation, underscoring an urgent need for therapies. Here, we reveal that low messenger RNA expression of SETD2 (SET domain containing 2) in hematopoietic stem and progenitor cells (HSPCs) from patients with MDS carrying SRSF2P95 mutations (SRSF2P95-Mut MDS) correlates with adverse outcomes and increased inflammation. Multivariate analysis confirmed the correlation between low SETD2 expression and poor prognosis in patients with SRSF2P95-Mut MDS. Furthermore, Setd2 loss in the Srsf2P95H/+ mouse model resulted in lethal MDS with hyperinflammation and expansion of myeloid-derived suppressor cells (MDSCs). Mechanistically, SETD2 methylates SRSF2P95H at lysine-17 and lysine-65 to inhibit aberrant splicing of CEACAM1-4 (isoforms of carcinoembryonic antigen cell adhesion molecule), which enhances interleukin-1β (IL-1β) signaling through Slc7a11 (solute carrier family 7 member 11)-mediated cystine uptake, thereby promoting HSPC differentiation into MDSCs, establishing an IL-1β-driven immunosuppressive microenvironment. These findings identify the SRSF2P95HK17me1K65me2-CEACAM1-4 signaling axis as a promising therapeutic target in SRSF2P95-Mut MDS.