I'd bet the supply chain is the reason for a processor refresh only. The manufacturing plants in China are short on workers like every country is this past year. Changing a manufacturing line and production process would have issues. On the other hand, components would be easier without the touch bar for the same reasons.
I think the plan was to change the form factor and they're putting it off to avoid production issues personally. The base model is looooong overdue for a full refresh, especially those bezels.
That is indeed a possibility or (at least for the moment) Apple wants to keep the 13.3" model around as-is because that allows them to continue to place it as a less-expensive alternative to the 14" MacBook Pro (being $300 cheaper when configured with 16GB/512GB and $700 cheaper when configured with 8GB/256GB).
I think where things could get muddy for consumers is when Apple launches the redesigned M2 MacBook Air this Fall as that is rumored to have a Mini-LED display. I personally expect Apple will raise the price of the M2 MBA to $1099 or $1199, keeping the M1 MBA around at $999 (or perhaps $899). So the MBA will have a nicer display for less money then the 13.3" MBP.