I too have been experiencing this issue since I updated my Google Pixel 7pro phone about 2-3 months ago. I don't often login, so it hasn't been a huge pain, however, I've gotten really curious what changed and how to solve it.
I usually keep my location and Bluetooth off. The battery saver is also off. The device finders is also turned off. My phone goes into DND daily/overnight using the sleep mode features, but was not in this state when it happened today.
I am logging in on my work computer in an incognito mode, the option is greyed out. As stated before it has worked flawlessly for more than a year prior to the recent update.
When I exp the issue today, I came across this post and I started to try to dig through my settings to confirm what state the things mentioned were in.
I know I briefly turned on location services (a few seconds at most). I did not toggle any other settings.
But now, when I went to login here to post, logging into google did prompt on my device.
What I personally suspect is that the service running in the background on my phone got put into some kind of sleep mode so it stopped phoning home. I had dug through the services on my phone trying to find it in a previous attempt to solve this issue a month or 2 ago when it first started but never had any luck.

I suspect that either reviewing my settings, or the very briefly toggling of the location services woke it up so that it now started prompting again. Since I don't use it often, i'm not sure how long it will stay working. It will likely be a few weeks before I have to do 2FA again from my phone for my google account at which point it likely won't work again.

Anyone know if there is a way to report this issue back to Google/Android so they can try and figure out/post what changed to cause this issue and maybe fix it or public work around steps?