However, delays in communication (either the ability to understand or use spoken language) can signal more serious problems. Since I don't know this child, I can't make a diagnosis, of course, but I can offer some possibilities to consider. This problem with communication could be a manifestation of severe early language-based learning disabilities. It could also signal a significant developmental (intellectual) delay. Does your nephew interact with people and objects in his world in a meaningful, way? Does he use appropriate gestures to get people to do what he wants or to make his needs known? Does he use objects in ways that are appropriate (given his young age)? Does he accurately copy or imitate the actions of other people? If not, he may be intellectually limited and delayed speech is just one aspect of a general developmental delay or retardation.
Children with autism often have a history that includes delays in speech or a deterioration of communication skills after they appeared to be developing normally. If your nephew exhibits odd mannerisms (repetitive movements or self-stimulatory behavior such as repeatedly playing with wheels on toy trucks, rocking, spinning, or hand-flapping), then it's important to consider this diagnosis.
Hearing loss would certainly cause the problems you describe, but it sounds as if this has been ruled out. (Is this little boy aware of environmental noises? Does he look up when people enter the room or when a fire engine goes by? If not, then look again at hearing as the cause). Make sure to ask his pediatrician what he or she thinks, and have your nephew evaluated by a speech and language pathologist who specializes in young children. Getting to the bottom of this now is very important, since the earlier any necessary therapies are begun, the more effective they will be.