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 seven 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 slightly 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.
Prime Minister Anthony Albanese welcomed the decision after arguing for a rise that ensured wages did not go backwards when compared to inflation, which sits at 5.1 per cent.
"It makes a difference to people who are struggling with the cost of living and it justifies our position that ... we didn't want people on the minimum wage to go backwards," he said.
"Many of those people on the minimum wage are the heroes that saw us through the pandemic.
"These workers deserve more than our thanks, they deserve a pay rise and today they've got it."
Australian Council of Trade Unions secretary Sally McManus said the increase would make a significant difference to the pressures low-paid workers face after pushing for a 5.5 per cent increase.
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.
"It'll make it more difficult for them to invest and to expand their capacity."
But Mr Albanese says the wage increase will boost spending, with people on minimum wages putting the money back into the economy.
"If you are on the minimum wage, you are also spending every dollar that you have, every dollar that you receive will go back into the economy," he said.
"It won't go into savings, won't go into an overseas holiday. It will go into food on the table for the kids."
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.
