Great work on finding the solution. Thanks for taking the time to post an update with your findings. That is valuable information for me as a newbie to this subject of proxies.
I was also able to reproduce the issue when I set the proxy configuration via the environment variable (I was previously setting it via the Windows "Network & Internet" settings page).
If you do want to continue to use these environment variables, I found I was able to disable it for the localhost hostname specifically by defining an environment variable named no_proxy with the value localhost.