In recent years, residential segregation has become a major issue in the Swedish policy debate. The prevailing view is that residential segregation is a crucial contributing factor to the development of income inequality, since individual income prospects are thought to be influenced by the population characteristics of their neighbourhoods. This study takes the opposite approach and analyses the extent to which, in the period 1991–2010, rising income inequality contributed to the development of residential segregation by income in Swedish metropolitan areas. The period was characterized by unprecedented growth in income inequality, which was associated with a decline in the redistributive power of the welfare state. Residential segregation by income mirrored locally the general trend in income inequality. Another factor was the change in income dispersion in neighbourhoods, relative to the metropolitan areas as a whole, which indicates a tendency towards increased population homogeneity in neighbourhoods with respect to income.