Is it dementia or something?

DILCaregiver2, my own Mom did the same thing with her hearing loss, and my Mom didn't have dementia during that time frame.

When my own Mom did figure out the subject of the conversation she would start talking on the subject even though the context of the subject was different. I believe what your Mom-in-Law is doing is quite normal and probably not related to dementia.

She’s got major hearing loss. Audiologist says she also has trouble understanding even some words that she does hear. This is like she subconsciously hears something and then chimes in as if she’s bringing the subject up for the first time.

Your profile indicates your MIL has hearing loss. Is this just a conclusion or the result of an actual test by an audiologist? It could very well be a memory thing... has she ever had a cognitive and memory test by her physician? If not, I'd get this done first.