As in other Western countries, in Sweden there is a widespread conviction that residential segregation influences the opportunities for residents social mobility and therefore is a cause of income inequality. But the opposite direction of causality, from income inequality to residential segregation, is often ignored. The paper fills this gap and analyses income inequality and economic residential segregation developments in Malmo in the years 1991-2010. During this period, changes in population composition owing to increased immigration had a negligible impact on income inequality, while the latter was primarily influenced by changes in the distribution of labour market earnings and capital incomes. At the same time, neighbourhood income inequality was predominantly driven by overall household income inequality and only to a much lower extent by the increase in residential sorting by income. Policy influencing income distribution rather than area-based strategies should thus be at the centre of current debates on residential segregation in Sweden.