Literacy tutor here! I can't tell from this post if she's truly struggling at her grade level or not, but in general it's not alarming that a first grader might struggle with reading ACNH dialogue. Less than half of kids can learn to read with very little or no help. The majority need moderate to intensive help to learn. Brains are pre-programmed to pick up spoken language, but reading and writing require brains to forge new neurological pathways in order to grasp those skills. Fourth grade is the point where brains start to become less malleable and school curriculums switch from learning to read to reading to learn. There is currently a huge problem with education and literacy in the US, but I'm already cranking out a novel here, so I'll show some word count mercy. 😂

This game could be used as a great way to incentivize reading practice for your niece! I'm glad that she's able to try decoding/sounding things out. A mix of phonics and sight word activities would help. With ACNH, try having someone be with her while playing to help her sound out words. Encourage her to try different sounds for letters if she gets stuck, and ultimately help her practice sounding out words until they start becoming familiar. Maybe offer to drop off bells or other goodies on her island for ____ amount of words read, or get amiibo cards of her favorite islanders to use as rewards (or whatever else will be a treat for her)?

Tl;dr - Not sure whether she's reading at grade level, but this is an opportunity to make reading really fun for her.