More than 2.6 million Australians will get a $40 a week pay rise from July 1 following a decision by the Fair Work Commission.
The 5.2 per cent increase for the country's lowest-paid workers was necessary to deal with rising grocery and fuel prices, with inflation sitting on 5.1 per cent and set to go to six per cent by the end of the year.
The national minimum wage will now sit at $812.60 per week, or $21.38 per hour.
"The most significant changes since last year's review decision have been a sharp increase in the cost of living and the strengthening of the labour market," commission president Iain Ross said while handing down the decision on Wednesday.
"The lowest paid are particularly vulnerable in the context of rising inflation.
"The present circumstances warrant an approach which gives a greater level of support to the low paid while seeking to contain inflationary pressures."
The modern minimum award wage will go up by a sl ightly lower 4.6 per cent, subject to a minimum increase of $40 a week.
Mr Ross says the adjustments will not have a negative effect on the performance and competitiveness of the economy and real wage cuts for some award-reliant employees can be addressed in subsequent reviews.
The changes come into effect from July 1, unless for exceptional circumstances.
But the aviation, tourism and hospitality sectors will have their pay increases deferred to October 1.
Last year, the national minimum wage increased by 2.5 per cent to $772.60 a week, or $20.33 an hour.
The Albanese government had argued for a rise that ensured wages did not go backwards when compared to inflation, which sits at 5.1 per cent.
Australian Council of Trade Unions secretary Sally McManus said she was pleased with the commission's decision after pushing for a 5.5 per cent increase.
"It is going to make a significant difference to the pressures that low-paid workers are under with cost of living rising," she t old reporters in Melbourne.
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While inflation is forecast to rise even further, with predictions from the Reserve Bank governor it could go as high as seven per cent, Ms McManus said she was mindful of not adding to further inflation.
"If it continues longer than a year, obviously we will need to make sure workers get pay rises that mean they keep their heads above water," she said.
But the head of the Australian Chamber of Commerce and Industry says the increase will add $7.9 billion of costs onto businesses, which will either affect bottom lines or be passed on to consumers.
Andrew McKellar said the decision will add to inflationary pressures, and in the worst cases make some businesses unviable.
"It comes at a time when inflation is emerging as one of the most urgent challenges facing the Australian economy," he said.
"If we are to address that, if we are to remain competitive, then clearly this is not a decision that will help in those circumstances.
"It'll make it more difficult for them to invest and to expand their capacity."
Mr McKellar called for a more flexible industrial relations system in relation to award wages.
"We need to get back to a much more effective enterprise bargaining, flexible wage setting driven by the market," he said.
The wages decision comes after federal politicians, judges and senior public servants were granted a pay rise of 2.75 per cent from July 1 following a determination from the independent remuneration tribunal.
- Australian Associated Press
