I had this problem and it turns out it was my oh-my-posh command prompt customization. VS Code injects certain control characters into the output stream for agents to observe events and the theming runs after those mechanics are hooked up so it can interfere. Updating to the latest oh-my-posh fixed it for me.

Here's the oh-my-posh GH issue[0] in case your problem is similar but not solvable with a simple package update.

[0]: https://github.com/JanDeDobbeleer/oh-my-posh/issues/7029