Astrocyte dysfunction and neuroinflammation are detrimental features in multiple pathologies of the CNS. Therefore, the development of methods that produce functional human astrocytes represents an advance in the study of neurological diseases. Here we report an efficient method for inflammation-responsive astrocyte generation from induced pluripotent stem cells (iPSCs) and embryonic stem cells. This protocol uses an intermediate glial progenitor stage and generates functional astrocytes that show levels of glutamate uptake and calcium activation comparable with those observed in human primary astrocytes. Stimulation of stem cell-derived astrocytes with interleukin-1β or tumor necrosis factor α elicits a strong and rapid pro-inflammatory response. RNA-sequencing transcriptome profiling confirmed that similar gene expression changes occurred in iPSC-derived and primary astrocytes upon stimulation with interleukin-1β. This protocol represents an important tool for modeling in-a-dish neurological diseases with an inflammatory component, allowing for the investigation of the role of diseased astrocytes in neuronal degeneration.