Hi dalenbe2.
If you toggle the settings in the drop-down menu, to the left of the selected photo, currently "fill screen", to one of the other options such as Tile or Stretch, does this change the outcome?
I'm sure I read another similar post awhile ago and the problem there was that the image was either too-large, the maximum number of pixels H & W exceeded the maximum allowed by the desktop background, although I can't find that specified anywhere in Apple doc's, or that the image was in the wrong format, only .jpeg, .png, .tiff .heic or .pict are supported, but I can't find that old thread and my memories not that great these days so I can't guarantee that was really the cause.
Lastly, what if you import the image you want into the included Mac Photos App and then select it from the Photos menu in the Desktop & Screen Saver window?
I can't reproduce what you are seeing on my Intel based 2017 iMac Pro running macOS Monterey 12.2.1, so maybe this is something that only affects the Apple Silicon Mac's?
If you have not already done so, after the first restart following a macOS software update I have read that sometimes a second restart is necessary before the macOS is fully re-initialised on these Macs with Apple Silicon.
Sorry I couldn't find anything more helpful to suggest...
Will.