I don't know 'up oneself,' so it might be BE, but the description does sound close. And 'verpeilt' doesn't seem right, since it seems to mean out of it, not with it, spaced out, distracted. Just blind also doesn't quite get it.
Having your head up your ass is just an exaggerated version of being an asshole -- being such a jerk that you not only don't care about others' feelings, you can't even perceive they exist, because you're so, er, full of yourself. And the colon is even more extreme, more sarcastic -- and it also takes a moment for the joke to sink in, which is part of what makes it funny.
L.G. or dude or Bubb or someone can probably think of some more colorful way to say that in German. Just narcissistic or not seeing over the Tellerrand don't seem strong enough.