There should be an 'Upload attachment' section under the post a reply area
2 boxes - one for the file (which will allow you to browse to it) and a second box for a caption.
If you click [Add the file] - a popup window will inform you it is uploading. Then the boxes empty.
NOW - you will see an
Attachments: section below the main message body - with an option to 'Place inline'
This is the image placed inline:

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