In the current study,we propose that, in the era of generative AI, there is now a new form of literacy called "prompt literacy," which refers to the ability to generate precise prompts as input for AI systems, interpret the outputs, and iteratively refine prompts to achieve desired results. To explore the emergence and development of this literacy skill, the current study examined 30 EFL students' engagement in an AI-powered image creation project, through which they created artworks representing the socio-cultural meanings of English words by iteratively drafting and refining prompts in generative AI tools. By examining AI-generated images and the participants' drafting and revision of their prompts, this study demonstrated the emergence of learners' prompt literacy skills. The survey data further showed the participants' perceived improvement in their vocabulary learning strategies as a result of engaging in the target AI-powered project. In addition, the participants' post-project reflection revealed three benefits of developing prompt literacy: enjoyment from manifesting imagined outcomes; recognition of its importance for communication, problem-solving and career development; and the enhanced understanding of the collaborative nature of human-AI interaction. These findings suggest that prompt literacy is an increasingly crucial literacy for the AI era.