This study examines the interaction between income inequality and human development in lower-middle and upper-middle-income countries over the period 2005–2023 using a panel dataset and the Panel VAR method. As a measure of income inequality, the Palma ratio—which better captures disparities between the richest and poorest segments of society compared to the commonly used Gini coefficient—is employed. Human development is measured by the Human Development Index (HDI). The empirical findings reveal that there is no direct or strong causal relationship between income inequality and human development in the countries under consideration. Results from the Granger causality test and variance decomposition indicate that both variables are largely driven by their own internal dynamics and have limited explanatory power for each other’s future values. These findings are consistent with strands of the literature suggesting that the relationship between inequality and development is context-specific and highly sensitive to country characteristics. In particular, differences in social infrastructure, public policies, and economic structures may alter the direction and strength of the inequality–development nexus. The results also highlight that human development is shaped less by short-term fluctuations in income distribution and more by structural, multidimensional, and long-term policy interventions. Reforms targeting education, healthcare, social protection, and equal opportunities are crucial not only for improving human development but also for fostering a fairer and more sustainable economic structure.