In this article, we review current evidence linking immune dysfunction in schizophrenia and related psychotic disorders focusing particularly on circulating cytokines, oxidative stress and cellular markers of inflammation in various stages on illness from drug-naïve first episode psychosis to chronic schizophrenia. Acute psychotic episode is associated with low-grade systemic inflammation in some patients, as reflected by increased concentrations of cytokines and other inflammatory markers in peripheral blood. Evidence from general population-based longitudinal cohort studies reporting an association between elevated inflammatory markers in childhood/adolescence and risk of schizophrenia and related psychosis subsequently in adulthood suggest that inflammation could be a causal risk factor for psychosis rather than simply be a consequence of illness. Mendelian randomization studies also suggest that associations between IL-6, CRP and schizophrenia are likely to be causal. In addition, we discuss evidence for disruptions in oxidative stress markers and CSF cytokine levels in schizophrenia, and potential reasons for reported trans-diagnostic associations for inflammatory cytokines including role of early-life adversity/maltreatment. We argue that low-grade inflammation is a clinically useful feature, because it is associated with poor response to antipsychotic medication in first episode psychosis. We discuss clinical implications for immunological understanding of schizophrenia including scope for clinical trials of anti-inflammatory agents and notable gaps in current knowledge, and offer suggestions for future research.