Diabetic encephalopathy (DE) is a severe complication of diabetes mellitus affecting the central nervous system (CNS), characterized by cognitive dysfunction. This review systematically explores how the interplay between brain insulin resistance (BIR) and neuroinflammation contributes to the pathogenesis of DE. BIR refers to the diminished responsiveness of the CNS to insulin signaling, resulting in the suppression of the PI3K/Akt and MAPK pathways, impaired glucose metabolism, and dysfunction across multiple neural cell types—including neurons, astrocytes, microglia, brain endothelial cells, and oligodendrocytes. These disturbances manifest as impaired energy metabolism, compromised synaptic plasticity, disruption of the blood–brain barrier, and reduced myelination. Importantly, BIR and neuroinflammation form a vicious cycle within these cells, mutually exacerbating each other and jointly driving the pathological progression of DE. Finally, we have compiled a list of currently available drugs that can improve BIR and suppress neuroinflammation, along with the latest progress in clinical trials, to provide new insights for the future of precision treatment for DE.