One of the most difficult things about dementia is that it often begins with a little lowering of inhibitions, and a more exaggerated form of certain behaviours. Like the early stages of many progressive illnesses, it is difficult to know what is going on.
I would, within the family, discuss this possibility, whilst recognising that it may not be yet possible to diagnose dementia (and it may not be dementia).
I do wonder if "....I love upsetting people" is some sort of 'cover up' - the kind that often happens in the early stages of dementia.
My own mother did not upset people like this - but her rather bohemian nature came to the fore and she said some quite inappropriate things, then saying 'oh you know, I like things out in the open', for a few years before dementia became obvious.
Grand-daughter needs reassuring of course, and the choice to keep away if she wishes. I think that the rest of you can work together on handling it as best you can, and use each other for support.
Time will tell.