Short answer:
An AirTag is very useful as a lost-item finder, but it should not be thought of as a miniature GPS tracker. If your requirement is to continuously know the current location of a moving object, a GPS/cellular tracker would be the more appropriate product. If your goal is to find keys, luggage, bags, or another personal item that has been misplaced or left behind, that is where the AirTag and Apple's Find My network are designed to work particularly well.
A bit longer answer:
I understand your frustration, especially when the AirTag is physically in your hand but the Find My app appears to show it a half-mile or even several miles away. The important thing to understand is that an AirTag is not a GPS tracking device, and the location shown on the map should not always be interpreted as the AirTag's current, continuously measured location.
An AirTag does not contain GPS and does not independently determine its latitude and longitude. Instead, it uses Bluetooth to communicate with nearby Apple devices. Those devices can anonymously and securely report the AirTag's approximate location to Apple's Find My network. As a result, the location shown on the map may sometimes be the last location reported through the Find My network rather than the AirTag's exact location at that moment.
This also explains why having the AirTag next to your iPhone does not necessarily mean that the map location will immediately update to your exact position. Bluetooth tells the iPhone that the AirTag is nearby, but the map location displayed by Find My depends on Apple's location services and Find My network information. If the iPhone's own location is temporarily inaccurate, Location Services are restricted, Bluetooth or Find My settings are not functioning correctly, or the displayed information has not yet refreshed, the map can show a location that does not correspond to where you and the AirTag actually are.
When the AirTag is nearby, the better way to locate it is not to rely on the map. In Find My, select Items, select the AirTag, and use Find Nearby when that option is available. On compatible iPhones, Find Nearby uses Ultra Wideband technology to help determine the AirTag's direction and distance at close range. You can also use Play Sound. Those features are intended for finding something nearby—for example, keys somewhere in your house—whereas the map is more useful for determining where a lost item was last detected by the Find My network.
This is really what AirTags are designed for. Suppose you leave a suitcase at an airport, your keys at a restaurant, or a backpack somewhere across town. Even though you are nowhere near the AirTag, another Apple device passing near it may detect its Bluetooth signal and securely relay its approximate location through the Find My network. That can give you a very useful indication of where the missing item is located without the AirTag needing cellular service, GPS, or a monthly subscription.
Since your AirTag is sometimes showing locations miles away even while it is next to your iPhone, however, I would recommend checking a few things rather than simply accepting that behavior. Make sure Bluetooth and Wi-Fi are enabled, Settings > Privacy & Security > Location Services is enabled, and Find My has the appropriate Location Services access. Also verify that Find My network is enabled under your Apple Account's Find My settings. Restarting the iPhone and removing and reinserting the AirTag battery can also be worthwhile if the problem continues.
As a simple test, place the AirTag next to the iPhone, open Find My > Items, select the AirTag, and see whether Find Nearby is available. If Find Nearby correctly recognizes that the AirTag is only a few feet away while the map continues to place it miles away, that would strongly suggest that the problem is with the location being displayed or reported by Find My rather than with the AirTag's Bluetooth connection itself.
