This only bothers me if I've already said hello. If I'm out somewhere and recognize someone but neither of us say anything, I'm not offended because I also didn't say anything! Sometimes, like you said, you just don't have the bandwidth. I also sometimes can't place people right away -- maybe we worked together? Maybe grad school classmate? Maybe our kids were in an activity together? I've lived in the same place for two decades and have met hundreds (thousands) of people and talked to them a few times and then never thought of them again.
But if I see someone I know and take the time to make eye contact and say hello, it is incredibly rude when people don't say hello back. I'm sure most of the time it's just they don't recognize me, which is fine -- I've been there. But if someone says hello to you, the bare minimum you can do is say hi back. As a PP said "Hi, nice to see you," and then continue on your way, even if you can't place them. It spares them that feeling of being invisible, or feeling embarrassed. It's always really weird to me when people won't even go to this trouble.