High-fat diets (HFD) increase lipopolysaccharide (LPS) activity in the blood and may contribute to systemic inflammation with obesity. We hypothesized that dietary milk sphingomyelin (SM), which reduces lipid absorption and colitis in mice, would reduce inflammation and be mediated through effects on gut health and LPS activity. C57BL/6J mice were fed high-fat, high-cholesterol diets (HFD, n = 14) or the same diets with milk SM (HFD-MSM, 0.1% by weight, n = 14) for 10 weeks. HFD-MSM significantly reduced serum inflammatory markers and tended to lower serum LPS (p = 0.08) compared to HFD. Gene expression related to gut barrier function and macrophage inflammation were largely unchanged in colon and mesenteric adipose tissues. Cecal gut microbiota composition showed greater abundance of Acetatifactor genus in mice fed milk SM, but minimal changes in other taxa. Milk SM significantly attenuated the effect of LPS on pro-inflammatory gene expression in RAW264.7 macrophages. Milk SM lost its effects when hydrolysis was blocked, while long-chain ceramides and sphingosine, but not dihydroceramides, were anti-inflammatory. Our data suggest that dietary milk SM may be effective in reducing systemic inflammation through inhibition of LPS activity and that hydrolytic products of milk SM are important for these effects.