My son was searching for "night vision potion" in the creative mode inventory search. He typed the first three letters, noticed it was replaced by asterisks, and thereby learnt a new offensive word. He didn't even know that racial slurs existed prior to this.

I'd suggest text is only censored when you finish typing in chat, on signs, etc; not in places like this where only the player will see it, and not while they're still mid-typing.