The Fair Work Commission has raised minimum award rates, triggering some concerns over inflation.

The Fair Work Commission (FWC) has announced an increase in minimum award rates for over 2.4 million workers, with a significant 8.6 per cent pay bump for around 180,000 individuals on the lowest national rate. 

The national minimum wage will rise from $21.38 to $23.23 per hour, a $70 weekly increase from $812.60 to $882.80. 

However, the majority of award workers will receive a 5.75 per cent increase, marking the largest in decades, in addition to last year's 4.6 per cent to 5.2 per cent raises.

FWC President Adam Hatcher explained that the decision to provide a below-inflation pay rise for award workers aimed to prevent high inflation expectations. 

Hatcher said that the increase would contribute modestly to total wages growth and would not trigger a wage-price spiral.

While the FWC awarded a 5.75 per cent increase to both national minimum wage and higher award rates, it also decided to end the 25-year alignment of the national minimum wage rate with the C14 rate. 

The alignment will now shift to the C13 rate, benefiting national minimum wage workers with an 8.6 per cent increase, totaling $1.85 per hour.

The Australian Council of Trade Unions had called for a 7 per cent increase to address the rising cost of living, while employers urged caution with wage rises between 3 per cent and 3.8 per cent. 

Economists closely monitored the decision, concerned that a wage rise above 5 per cent could lead to a wage-price spiral and potential Reserve Bank rate increases.

The wage increase will take effect on July 1, but it may also result in further interest rate rises by the Reserve Bank of Australia. 

Many believe the wage-setting system is now conflicting with monetary policy's goal of containing inflation, raising the possibility of multiple interest rate increases in the coming months.

RBA Governor Philip Lowe has been warning about the combination of higher wage rises and stagnant labour productivity.

He says the Labor government cannot solely attribute inflation to external factors and must consider the impact of wage rises exceeding the inflation target. 

Lowe suggested that average nominal wage rises of 3 per cent to 4 per cent are typically sustainable, assuming 1 per cent labour productivity growth.

With labour productivity remaining flat, unit labour costs are rising, which is likely to lead to increased business costs passed on to consumers. 

The RBA could see its cash rate of 3.85 per cent as too low compared to other major central banks.