Background Schizophrenia is associated with impaired neurodevelopment as indexed by lower premorbid IQ. We examined associations between erythrocyte sedimentation rate (ESR), a marker of low-grade systemic inflammation, IQ, and subsequent schizophrenia and other non-affective psychoses (ONAP) to elucidate the role of neurodevelopment and inflammation in pathogenesis of psychosis. Methods Population-based data on ESR and IQ from 638213 Swedish men assessed during military conscription between 1969 and 1983 were linked to National Hospital Discharge Register for hospitalisation with schizophrenia and ONAP. The associations of ESR with IQ (cross-sectional) and psychoses (longitudinal) were investigated using linear and Cox-regression. Co-relative analysis was used to examine effects of shared familial confounding. We examined mediation and moderation of effect between ESR and IQ on psychosis risk. Results Baseline IQ was associated with subsequent risk of schizophrenia (adjusted HR per 1-point increase in IQ=0.961; 95% CI: 0.960-0.963) and ONAP (adjusted HR=0.973; 95% CI: 0.971-0.975). Higher ESR was associated with lower IQ in a dose-response fashion. High ESR was associated with increased risk for schizophrenia (adjusted HR=1.14; 95% CI: 1.01-1.28) and decreased risk for ONAP (adjusted HR=0.85; 95% CI: 0.74-0.96), although these effects were specific to one ESR band (7-10mm/hr). Familial confounding explained ESR-IQ but not ESR-psychoses associations. IQ partly mediated the ESR-psychosis relationships. Conclusions Lower IQ is associated with low-grade systemic inflammation and with increased risk of schizophrenia and ONAP in adulthood. Low-grade inflammation may influence schizophrenia risk by affecting neurodevelopment. Future studies should explore the differential effects of inflammation on different types of psychosis.