Consumers have regained some of their confidence after sentiment plummeted following the August interest rate hike.
Consumer confidence grew for the second week in a row despite weak wages growth and expectations of more interest rate hikes.
Up by 1.7 per cent, confidence is now at its highest level since June based on the latest ANZ-Roy Morgan survey.
This follows a 4.9 per cent jump in consumer sentiment the week before.
However, consumer sentiment is still "exceptionally low" compared to the long-run average.
ANZ head of economics David Plank said the fall in the unemployment rate may have fed into the uptick in sentiment, although the drop in wages in real terms likely dampened results.
"Consistent with this, confidence is still exceptionally low but consumers are modestly optimistic about their future financial situation despite the prospect of further increases in interest rates," Mr Plank said.
Four of the five subindices increased, with "future financial conditions" rising by 1.4 per cent.
"Current financial conditions" fell by three per cent.
"Weekly inflation expectation" dropped 0.3 to 5.5 per cent, while its four-week moving average dropped 0.1 to 5.6 per cent.
"Current economic conditions" jumped by 8.4 per cent - reaching its highest level since the end of May.
The "Time to buy a major household item" metric also ticked upwards for the first time in three weeks, increasing by 2.4 per cent.
Confidence improved in NSW, Victoria, Queensland and South Australia but fell in Western Australia.
However, confidence was already highest in WA.
The Reserve Bank of Australia pointed to household spending as a source of "uncertainty" ahead of its September decision, noting that consumer confidence was generally falling but household incomes were also benefiting from the tight labour market.
Aggressive policy tightening since May has also likely had a hand in the first decline in business activity in the private sector since the COVID-19 Omicron variant wreaked havoc in January.
Australia's growth engine - the services economy - fell to a seven-month low of 49.6 in August from 50.9 in July, according to the preliminary S&P Global Australia Purchasing Managers' index.
A reading below 50 points to a contraction in activity, CommSec senior economist Ryan Felsman said.
The manufacturing indicator also dropped to a 12-month low of 54.5 in August from 55.7 in July.
Businesses from the services sector responding to the survey blamed inflated costs of energy, fuel and labour for the weak results. Ongoing supply chain disruptions also played a role.
These higher input costs were being passed on to customers, the respondents said.
Job creation in the services sector also declined in August due to worker shortages and a spike in resignations.
With the RBA tipped to keep hiking rates, S&P Global economists said this "bodes ill" for the wider economy that's showing signs of underlying weakness.
"Certainly, the weaker run of recent economic data suggests that the steam is coming out of the Aussie economy as rising interest rates and skyrocketing inflation bite," Mr Felsman said.
