For a compressed air energy storage (CAES) system to be competitive for the electrical grid, the air compressor/expander must be capable of high pressure, efficient and power dense. However, there is a trade-off between efficiency and power density mediated by heat transfer, such that as the process time increases, efficiency increases at the expense of decreasing power. This trade-off can be mitigated in a liquid (water) piston aircompressor/ expander with enhanced heat transfer. However, in the past, dry air has been assumed in the design and analysis of the compression/expansion process. This paper investigates the effect of moisture on the compression efficiency and power. Evaporation and condensation of water play contradictory roles - while evaporation absorbs latent heat enhancing cooling, the tiny water droplets that form as water condenses also increase the apparent heat capacity. To investigate the effect of moisture, a 0-D numerical model that takes into account the water evaporation/ condensation and water droplets have been developed. Results show that inclusion of moisture improves the efficiencypower trade-off minimally at lower flow rates, high efficiency cases, and more significantly at higher flow rates, lower efficiency cases. The improvement is primarily attributed to the increase in apparent heat capacity due to the increased propensity of water to evaporate.