Problem:
Spacing around inlay hints has the same highlight as the hint itself.
The LSP spec for inlay hints specifically mentions the padding should not be
coloured:

    /**
    Render padding before the hint.
    Note: Padding should use the editor's background color, not the
    background color of the hint itself. That means padding can be used
    to visually align/separate an inlay hint.
    */
    paddingLeft?: boolean;
    /**
    Render padding after the hint.
    Note: Padding should use the editor's background color, not the
    background color of the hint itself. That means padding can be used
    to visually align/separate an inlay hint.
    */
    paddingRight?: boolean;

Solution:
Add the space as separate parts of the virtual text, don't add the space to the
text itself.