Camera blocks take internal volume. Smaller phones have less internal volume to spend - while still having to pack all the non-negotiables like the modem and the SoC into it. Something's got to give. And no one want that something to be the battery life going down to 6 hours.
Volume constraints are bad enough for "normal" models. "Minis" have it way worse.
The iPhone Air's SOC demonstrates that they could compact the actual SOC portion substantially. Add a bit of thickness back for the battery, and they could have a Mini with space for a decent camera and decent battery life. Remove the camera bump by making it a uniform thickness and the battery life would be fine.
But we already know that they can make a smaller iPhone with everything.
The iPhone 6 was a decade ago and was smaller in all dimensions than an iPhone 17 and had a perfectly acceptable battery life. Since then, they have removed headphone jacks and buttons, batteries have gotten more power dense, chips have gotten more efficient, etc.