A combination of nearest letter neighbour analysis, word frequency, and contextual clues allow the keyboard software to work out the word you are entering even if the input is ambigious (e.g. for double letters and/or similarly spelled words). It's also clever enough that you don't have to be particularly precise when tracing the slide gesture. As a result it is possible to achieve faster speeds than more traditional text entry methods.
To demonstrate the benefits and speed of the updated keyboard Microsoft set out to break the official world record for text entry into a mobile phone, as documented in this video:
The phrase typed out for a world record attempt is:
The razor-toothed piranhas of the genera Serrasalmus and Pygocentrus are the most ferocious freshwater fish in the world. In reality they seldom attack humans.
Using the new Windows Phone 8.1 keyboard Gaurav Sharma took just 18.44 seconds to write the phrase using Word Flow. That's equivalent to a speed of 84 words per minute. The previous record stood at 18.53 seconds (Samsung Android), with other platforms taking up to 35.4 seconds.
The typical user is unlikely to achieve anything close to the kind of speed reached in the sucessful record attempt, but with practise it should be possible to significantly increase text entry speed. While that is something that's true of almost any method of text entry method, it is fair to say that Windows Phone 8.1 and Word Flow will offer the option of faster and more flexible text input for a significant portion of its users, when compared to Windows Phone 8.0