An update is required to use cellular data on this iPhone. Why am I getting this error?

Likely because your carrier has an update, which needs to be installed on your iPhone. Usually, when you keep current with iOS updates, carrier settings update at the same time. Your tag line suggests you have an iPhone XR running iOS 16 and if that is correct, you're out of date with iOS updates. The current iOS version available for your iPhone is iOS 17.0.3. You should update your iPhone and your carrier settings will likely update at the same time.