Local comunication is made inside of your own computer, from one ‘part’ to another, one program to another.
So, if you use a local proxy, for instance, an annonimizer application, the traffic is redirected to this application and in order to scan it you must allow the local traffic and then we have: Internet > local proxy in your computer (127.0.0.1) > avast.
Did I make myself clear and simple? :
The ISP (Internet Service Provider) that you pay could offer some proxy server features.
Local proxy should be a program installed in your computer that redirects the traffic through itself.