How to undo/redo changes inside the selected cell in Jupyter notebook?

This global undo/redo is a new feature that enables Real Time Collaboration which was added in JupyterLab 3.1. It is indeed sub-optimal for many use cases.

JupyterLab 3.2 allows to disable notebook-wide history tracking (see issue 10791 nad PR 10949), but with a caveat: when moving cells you may loose the undo history, which is why the setting is marked as experimental (it requires more work to be exposed or enabled by a default). To get the selective undo/redo please add:

{
    "experimentalDisableDocumentWideUndoRedo": true
}

in Advanced Settings Editor → Notebook, save, and reload JupyterLab (if you use it in a browser a refresh should suffice).

You can also stick with JupyterLab 3.0 if this is a deal breaker. To downgrade you can use pip:

pip install "jupyterlab<3.1"

or conda:

conda install -c conda-forge "jupyterlab<3.1"

but I would recommend sticking with JupyterLab 3.2 and trying out the new setting so you can contribute to the discussion (if you experience any problems or believe it could be improved).

Recently I've also experienced the same annoying problem. I'm adding a picture here to illustrate how to disable "document-wide undo/redo".

JupyterLab -> Settings -> Advanced Settings Editor -> Notebook -> Ctrl-F to find "undo" -> check the box "Experimental settings to...".

After that remember to close and re-open JupyterLab!