Children who know how to recite Little Bo Beep or Wee Willie Winkie have a headstart in learning to read - especially boys, according to the report.
Weak rhyming skills are also associated with literacy problems later on in life.
By the end of key stage 1, around one in six pupils in Wales do not achieve the levels of seven-year-olds in listening and speaking. Boys were also 10 percentage points behind girls in standards of reading. Inspectors say this is because boys would rather engage in physical activities than sit down and look at a book.
The report claims that the sons of parents who can convince them to sit down to look at a book are more likely to succeed in English.
The best way for children to learn to read has gone full circle since the 1950s when phonics was the accepted approach. In the 1970s, the "look and say" method became the vogue before reverting back again.
Wales performs poorly in reading compared with other industrialised countries. In the case of Germany, we have twice as many adults at the lowest level of literacy.