Families were £1 better off a week in July – the largest annual increase since March 2010 - according to the Asda Income Tracker.
Families had £151 of weekly disposable income in the month, which is 0.6% up on last year as discretionary spend continues to improve.
The increase was driven by a fall in inflation across food, clothing and transport. This was supported by a drop in the unemployment rate to 8% for the three months to June, which is recorded as the lowest rate since last year.
However, if the month is put into context over two years families are still £8 down per week on disposable income available in 2010.
Asda president and chief executive Andy Clarke said: “At last this is a bit of light at the end of the tunnel for UK families – with the first improvement in disposable income for over two years.However customers still have less in their pockets this month than they did two years ago – there’s no doubt that balancing the books is still a challenge.
“Despite an improved picture, families have very real worries about unemployment and the fragility of the wider economic situation. It’s still tough out there.”
Slow pay growth and an uncertain economy is continuing to hold back income. Disposable income could also be impacted by increased prices on food and fuel, following a rise in the price of crude oil and food commodity prices in July.
But house and utility costs remain the biggest contributor to the cost of living, making up one third of the overall 2.6% inflation rate. Gas prices rose by 15.4% year-on-year in June while the cost of electricity increased by 8.0% and rental prices by 3.5%.
The cost of petrol and diesel dropped for the third consecutive month in July because falling crude oil prices earlier in the year fed through. Prices were 2% lower than last year.
The Centre for Economics and Business Research head of macroeconomics Charles Davis said: “However it may not be all plain sailing ahead as pressures remain. There is still much underlying weakness in the labour market and unemployment is likely to stay persistently high.
“In addition, recent increases in the cost of crude oil could well feed through into the cost of living in the coming months.”