The ability to predict future events in the environment and learn from them is a fundamental component of adaptive behavior across species. Here we propose that inferring predictions facilitates speech processing and word learning in the early stages of language development. Twelve‐ and 24‐month olds’ electrophysiological brain responses to heard syllables are faster and more robust when the preceding word context predicts the ending of a familiar word. For unfamiliar, novel word forms, however, word‐expectancy violation generates a prediction error response, the strength of which significantly correlates with children's vocabulary scores at 12 months. These results suggest that predictive coding may accelerate word recognition and support early learning of novel words, including not only the learning of heard word forms but also their mapping to meanings. Prediction error may mediate learning via attention, since infants’ attention allocation to the entire learning situation in natural environments could account for the link between prediction error and the understanding of word meanings. On the whole, the present results on predictive coding support the view that principles of brain function reported across domains in humans and non‐human animals apply to language and its development in the infant brain. A video abstract of this article can be viewed at: http://hy.fi/unitube/video/e1cbb495-41d8-462e-8660-0864a1abd02c. [Correction added on 27 January 2017, after first online publication: The video abstract link was added.] As indicated by brain responses, context‐based predictions facilitate word recognition in 12‐ and 24‐month‐old children (blue). Novel word forms generate a prediction error response (magenta), the strength of which significantly correlates with children's vocabulary scores at 12 months.