I don't have exactly comparable experience, but my mother (73, Alzheimer's and no short term memory), who has excellent hearing, does sometimes miss something or seem to not hear something, that we say to her. She also seems to not see things at times. I've noticed this happens somewhat unpredictably, but is especially noticeable if there is a lot of background noise and/or activity. For example, she can concentrate on a conversation much better in her rooms than in a restaurant.
Also, my mother often has difficulty pinpointing what a particular sound (not language, but noises) is and where it is coming from. A recent example is that her heater had a loose fan and was making a humming noise, and she was convinced it was the flagpole outside her window "vibrating in the wind."
While I'm not an expert, I would say that definitely the dementia could be getting in the way of her ability to process language or even just sounds.
There might be something helpful here:
https://www.alzheimers.org.uk/site/scripts/documents_info.php?documentID=130