Minimum wages will increase by at least $40 a week, with the hourly pay rate lifting from $20.33 to $21.38, the Fair Work Commission has ruled.

The commission handed down its decision in the annual wage review on Wednesday, granting a 5.2% increase to the national minimum wage and 4.6% for award minimums, amid a tight labour market and skyrocketing inflation.

The decision sets the pay of at least 2.7 million Australians on the national minimum or awards and will come into effect from 1 July.

But the commission ruled the increase will be delayed to 1 October in the aviation, tourism and hospitality sectors because of “exceptional circumstances”, including their slower recovery from the Covid recession.

The prime minister, Anthony Albanese, welcomed the decision and said it vindicated his position during the election campaign when he said he would “absolutely” back a wage rise in line with the 5.1% inflation rate.

“It makes a difference to people who are struggling with the cost of living, and it justifies our position that we took in making a different submission to the Fair Work Commission, that said we did not want people who are on the minimum wage to go backwards,” Albanese said at a press conference in Gladstone.

“Many of those people who are on the minimum wage are the heroes who saw us through the pandemic. These workers deserve more than our thanks, they deserve a pay rise and today, they’ve got it.”

Unions had asked for a 5.5% lift in the national minimum from $20.33 to $21.45 an hour, while employer groups had suggested more modest rises of about 2.5%.

A submission by the Albanese government called for low-paid workers’ pay not to go backwards, meaning a 5.1% increase in line with headline inflation, which the Reserve Bank of Australia has suggested will go as high as 7% by year’s end.

The Fair Work Commission president, justice Iain Ross, acknowledged that by ordering an increase lower than inflation some workers would receive a real wage cut, but suggested this could be fixed in later years.

The union movement welcomed the decision.

Sally McManus, secretary of the Australian Council of Trade Unions, said unions had “fought hard” for the increase against “employers pushing for big real wage cuts”.

But McManus said the review only sets pay for one in four workers, while changes were needed to bargaining laws to help get “wage growth across the economy”.

The Australian Chamber of Commerce and Industry chief executive, Andrew McKellar, warned the decision was a “risk to the economy” that would add $7.9bn to employers’ costs.

McKellar proposed that centralised wage fixing should be reserved for 180,000 minimum wage workers, while the 2.5 million people on awards should have their pay set on a “case-by-case basis”.

“We need to get back to much more effective enterprising bargaining, flexible wage setting driven by the market,” he said.

The Australian Industry Group chief executive, Innes Willox, said the decision would “add fuel to the inflation fire”.

Albanese shrugged off questions about the impact of the wage rise on businesses, saying the money would help prop up 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 into circulation,” the PM said.

“It won’t go into savings, not an overseas holiday. It will go into food on the table, for the kids of people on minimum wages. That is what this is about.”

Employment and workplace relations minister, Tony Burke, claimed a wage rise of this level “never would have happened” under the former Coalition government.

“The era of wages been deliberately low by the Liberal-National Party has effectively come to an end today,” he said, standing alongside Albanese in Gladstone.

“People will be seeing in their bank accounts what the change of government means… For the first time in nearly a decade, we’ve had a government argue for a real wage increase and now, it will be delivered.”

Earlier, McManus said unions had been “mindful of not adding to inflation, that is why we have never asked for a pay increase, that is more than inflation and productivity”.

The Fair Work Commission ordered modern award minimum rates to go up 4.6% “subject to a minimum increase of $40 per week”, meaning that employees on awards earning above $870 per week will receive a 4.6% increase while those below that level will get $40 more per week.

Ross said the “most significant changes” since last year’s decision was “a sharp increase in the cost of living and the strengthening of the labour market”.

He noted low-paid workers are “particularly vulnerable” to high inflation, which “erodes the real value of workers’ wages”, although it also has an impact on businesses’ costs.

Ross noted that unemployment had fallen from 5.5% last year to 3.9%, while inflation had increased from 1.1% to 5.1% in headline terms of 3.7% in underlying terms.

He said the tight labour market and higher inflation weigh in favour of a higher increase than last year’s 2.5%. He noted employers groups’ calls for a more modest increase would result in larger real pay cuts.

But Ross rejected unions’ calls for a bigger increase, finding that “in the present economic circumstances, [that would] pose a real risk of significant adverse effects to the national economy”.

“We acknowledge that the increases we have determined will mean a real wage cut for some award reliant employees.

“This is an issue that can be addressed in subsequent reviews.

“We are satisfied that exceptional circumstances exist, such as the warranty or delayed operative date for certain modern awards … in the aviation tourism and hospitality sector.”