The most generous wage rises for Australia’s lowest-paid workers in three years - including a 6 per cent boost for those on the minimum wage - now risks sparking two more interest rate rises that would see borrowing costs soar to the highest level in 18 years.

AMP has issued a fresh warning about a wage-price spiral worsening inflation after the Fair Work Commission granted increases to award wages and the minimum wage that was well above inflation.

Australia’s 2.7 million award-wage workers are receiving a 4.75 per cent pay rise that’s above inflation from July 1 - marking the most generous increase in three years that economists warn will spark two more interest rate hikes.

The pay bump was above April’s inflation rate of 4.2 per cent and much better than last year’s increase of 3.5 per cent, marking the biggest increase since 2023 for those mainly working in food services, retail, healthcare and social assistance and administration and support service roles.

From July 1, the national minimum wage is also rising by a more generous 6 per cent to $1004.90 a week or $26.44 an hour under industrial classification changes, with their annual full-time pay of $52,255 in the same 30 per cent marginal tax bracket for those earning up to $135,000.

This increase, taking their pay above $1000 a week for the first time, was in line with a submission from the Australian Council of Trade Unions and was also the most generous raise in three years.

The entry-level wage of $978.10 a week or $25.70 an hour will apply for new staff for no more than six months and is expected to affect 100,000 of the very lowest-paid workers.

The annual wage review decision affects 21.1 per cent of the Australian labour force or 2.8 million workers, including 2.7 million staff employed under a modern award.

AMP has now updated its forecasts to have two more Reserve Bank rate hikes by November, that would take the cash rate to an 18-year high of 4.85 per cent as higher wage costs worsened inflation.

“The Fair Work Commission announced a larger-than-inflation wage increase, which will directly impact more than 10 per cent of the national wage bill and potentially add upward pressures to wages across the broader Australian labour market,” economist My Bui said.

Fair Work Commission president Adam Hatcher said the lowest paid had been suffering cuts in real wages since the end of the pandemic in 2022 as inflation soared before price pressures returned late last year ahead of the Middle East conflict.

“We consider we should at least ensure that modern award reliant employees generally are not worse off in real terms than they were as at 1 July, 2025,” he said from the bench on Tuesday morning.

“We should also take additional measures to protect the position of the very lowest paid workers under modern awards.”

He expected the Reserve Bank’s three interest rate rises this year to slow the economy as inflation remained high, noting the gap between the consumer price index and modern awards “has particularly affected the living standards of the low paid and the capacity to meet their needs”.

“On top of this, the Australian economy faces the wildcard of the Middle East conflict,” Justice Hatcher said.

“This has added uncertainty as to the trajectory of the economy at least in the near future.

“A fundamental consideration that must be balanced against these matters is that most modern-award reliant employees are still in the position that their wage rates in real terms remain lower than what they were in July 2021, prior to the post-pandemic spike in inflation.”

But the industrial umpire rejected a call from unions for catch-up minimum pay increases to make up for cuts in real wages during several years of high inflation.

“We have concluded regrettably that it would not be practicable or responsible in the current uncertain circumstances to award a real wage increase for employees reliant on modern award wage rates that would be sufficient to close the real wage gap entirely,” Justice Hatcher said.

Employment Minister Amanda Rishworth and Treasurer Jim Chalmers had called for an “economically sustainable real wage increase” that was above inflation.

“This represents a real wage increase, supporting workers with cost-of-living pressures,” Ms Rishworth said on Tuesday in Canberra.

She also backed a higher 6 per cent increase in the minimum wage.

“They were the lowest-paid workers and have been hit hardest by the war in the Middle East and the resulting inflationary pressures, particularly in non-discretionary items like fuel and food,” she said.

“This decision today means the lowest-paid, full-time workers who rely on the national minimum wage for the first time will be paid over $1000 a week.”

The Australian Chamber of Commerce and Industry had recommended a 3.5 per cent increase that was lagging inflation even before the Iran war sparked an oil crisis, and calculated this latest decision would cost the economy $11.7 billion.

“For businesses that are already struggling with interest rate hikes, high inflation and high fuel prices, this decision putting up wage costs will only add to the burden,” ACCI’s chief of policy and advocacy David Alexander said.

The Australian Retail Council warned the 4.75 per cent increase would significantly increase labour costs for employers battling challenging trading conditions.

“Labour is one of the largest costs in running a retail business. Combined with rising energy, rent, insurance, freight, compliance and security costs, this decision will place additional strain on already thin margins across the sector,” the group’s chief legal and industrial relations officer Lindsay Carroll said.

But the Shop, Distributive and Allied Employees Association - the union representing retail workers - was disappointed the low-paid weren’t given a bigger increase to account for Reserve Bank expectations of inflation hitting a three-year high of 4.8 per cent by mid-year.

“The union is disappointed that unlike last year the Commission could not see its way clear to grant a real wage increase, except for the very lowest paid and new workforce entrants, at a time when workers are facing protracted cost of living pressures,” SDA national secretary Gerard Dwyer said.

Justice Hatcher said the workers in the female-dominated children’s services, dental assistants, pathologists, disability home care workers and pharmacy sectors would benefit following a review into award classifications to “eliminate gender-based undervaluation of work in modern awards” and “ensure that female workers receive equal remuneration for work of equal or comparable value”.

“These are all female-dominated occupations and we expect this to result in a further narrowing of the gender pay gap,” he said.

Women and girls made up 60 per cent of employed on the minimum wage or awards with 70 per cent working part-time hours with half rostered on as casuals.

Westpac economist Ryan Wells said the latest Fair Work Commission decision would be unlikely to add to inflationary pressures, considering it affected little more than one in five workers.

“Today’s decision for a larger increase in the minimum wage and awards will go some way against protecting more vulnerable workers’ wages against the inflation shock, but the outlook is still defined by a weaker economy and labour market, which will limit the bargaining power for many workers,” he said.