The local flag is for local UNIX socket connections only. It may be that your psql connection is registering in some other way. To workaround this, change all host entries to trust instead of password.
Edit the file pg_hba.conf ( /POSTGRES_INSTALL/data/pg_hba.conf). This file controls which hosts are allowed to connect, how clients are authenticated, which PostgreSQL user names they can use, and which databases they can access.
Records take one of these forms:
# local DATABASE USER METHOD [OPTIONS]
# host DATABASE USER ADDRESS METHOD [OPTIONS]
# hostssl DATABASE USER ADDRESS METHOD [OPTIONS]
# hostnossl DATABASE USER ADDRESS METHOD [OPTIONS]
host all all 127.0.0.1/32 trust
host all all 0.0.0.0/0 trust
# IPv6 all connections:
host all all ::/0 trust
If all of the above entries are set to trust, then no connection should prompt for a password. Make the above changes in the pg_hba.conf file.
This needs a recycle of PostgreSQL database after making the above changes.