<fo:root xmlns:fo="http://www.w3.org/1999/XSL/Format">
  <fo:layout-master-set>
    <fo:simple-page-master page-width="8.5in" page-height="11in" master-name="default-page">
      <fo:region-body margin="0.4in"/>
    </fo:simple-page-master>
    <fo:page-sequence-master master-name="document">
      <fo:repeatable-page-master-reference master-reference="default-page"/>
    </fo:page-sequence-master>
  </fo:layout-master-set>

  <fo:page-sequence master-reference="document">
    <fo:flow flow-name="xsl-region-body">
      <fo:block>
        <fo:block>
          <fo:inline>
            <fo:inline>  <!-- Removing this extra fo:inline fixes the problem. -->
              <fo:block>
                This is some text above.
              </fo:block>
              <fo:block>
                  <fo:external-graphic src="image.jpg" content-width="50%" content-height="50%"/>
              </fo:block>
              <fo:block>
                This is some text below.
              </fo:block>
            </fo:inline>
          </fo:inline>
        </fo:block>
      </fo:block>
    </fo:flow>
  </fo:page-sequence>
</fo:root>