Within the release notes for RHEL 8.5 we have:
The USB CD-ROM drive is not available as an installation source in Anaconda
Installation fails when the USB CD-ROM drive is the source for it and the Kickstart ignoredisk --onlyRed Hat Enterprise Linux 8.5 8.5 Release Notes
Installation fails when the USB CD-ROM drive is the source for it and the Kickstart ignoredisk --onlyuse= command is specified. In this case, Anaconda cannot find and use this source disk.
To work around this problem, use the harddrive --partition=sdX --dir=/ command to install from USB
CD-ROM drive. As a result, the installation does not fail.
However the workaround does not work, with the workaround set as above the installation source fails and requests a network link. So I will try to revert to 8.4 since USB kickstart did work with CENTOS 8.4. To get this to work the kickstart file has the cdrom option set, ignoredisk --only-use=sdb, repos set for APPstream, BaseOS and an extra one for additions. A %pre section is created to mount /dev/sda /run/install/repo.