However, concerns about the inflation outlook remain elevated heading into Tuesday's release of the consumer price index for the December quarter.
The weekly ANZ-Roy Morgan consumer confidence index - a pointer to future household spending - rose 2.2 per cent, partly recovering from its 7.6 per cent tumble the previous week, which was the weakest January result since 1992.
ANZ head of Australian economics David Plank said the recovery came in the same week that the jobless rate dropped to 4.2 per cent and amid signs that COVID-19 cases appeared to have peaked.
Confidence was driven by rises of 7.7 per cent in Victoria, 8.8 per cent in Western Australia and 3.7 per cent in Queensland.
However, NSW and South Australia posted declines of 2.4 per cent and 2.6 per cent respectively.
The survey's consumer inflation expectations rose 0.1 percentage point, returning to a recent seven-year high of five per cent.
It comes ahead of the latest inflation figures which are expected to show prices remain at the top of the Reserve Bank's two-to-three per cent target, fuelled by higher fuel and housing costs.
In the past week, the average national petrol price rose by 3.3 cents to equal a recent record high of 170.4 cents per litre, according to the Australian Institute of Petroleum.
Inflation pressures and the drop in the unemployment rate have rekindled speculation the RBA may be forced to raise interest rates this year, and earlier than it had previously anticipated.
Economists' forecasts point to a one per cent increase in the December quarter consumer price index that would take the annual rate to 3.1 per cent, up from three per cent as of the September quarter.
The more interest-rate sensitive underlying measure of inflation - which smooths out sharp price swings - is forecast to rise 0.7 per cent in the quarter, taking the annual rate to 2.4 per cent.
This compares with 2.1 per cent as of the September quarter, which was the first time it had been within the inflation target since 2015.
The RBA will hold its first board meeting of the year on February 1.
National Australia Bank will also issue its monthly business survey later on Tuesday.
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