diff --git a/config/install/entity_embed.settings.yml b/config/install/entity_embed.settings.yml
index 9bf5b728..936c74eb 100644
--- a/config/install/entity_embed.settings.yml
+++ b/config/install/entity_embed.settings.yml
@@ -1 +1,2 @@
+inline: false
 rendered_entity_mode: false
diff --git a/config/schema/entity_embed.schema.yml b/config/schema/entity_embed.schema.yml
index 014e705c..6d145151 100644
--- a/config/schema/entity_embed.schema.yml
+++ b/config/schema/entity_embed.schema.yml
@@ -37,3 +37,6 @@ entity_embed.settings:
     rendered_entity_mode:
       type: boolean
       label: 'Rendered entity mode'
+    inline:
+      type: boolean
+      label: 'Allow inline embedded entities'
diff --git a/js/plugins/drupalentity/plugin.js b/js/plugins/drupalentity/plugin.js
index 7e72e5ba..595cc4f7 100644
--- a/js/plugins/drupalentity/plugin.js
+++ b/js/plugins/drupalentity/plugin.js
@@ -18,9 +18,10 @@
       var dtd = CKEDITOR.dtd, tagName;
       dtd['drupal-entity'] = {'#': 1};
       // Register drupal-entity element as allowed child, in each tag that can
-      // contain a div element.
+      // contain a div or img element (if inline embedding is turned on in the
+      // settings).
       for (tagName in dtd) {
-        if (dtd[tagName].div) {
+        if (dtd[tagName].div || (dtd[tagName].img && editor.config.DrupalEntity_inline)) {
           dtd[tagName]['drupal-entity'] = 1;
         }
       }
diff --git a/src/Plugin/CKEditorPlugin/DrupalEntity.php b/src/Plugin/CKEditorPlugin/DrupalEntity.php
index 6de18483..f7d6c459 100644
--- a/src/Plugin/CKEditorPlugin/DrupalEntity.php
+++ b/src/Plugin/CKEditorPlugin/DrupalEntity.php
@@ -10,6 +10,7 @@
 use Drupal\editor\Entity\Editor;
 use Drupal\embed\EmbedButtonInterface;
 use Drupal\embed\EmbedCKEditorPluginBase;
+use Symfony\Component\DependencyInjection\ContainerInterface;
 
 /**
  * Defines the "drupalentity" plugin.
@@ -22,6 +23,17 @@
  */
 class DrupalEntity extends EmbedCKEditorPluginBase {
 
+  /**
+   * {@inheritdoc}
+   */
+  public static function create(ContainerInterface $container, array $configuration, $plugin_id, $plugin_definition) {
+    $configuration['inline'] = $container->get('config.factory')
+      ->get('entity_embed.settings')
+      ->get('inline');
+
+    return parent::create($container, $configuration, $plugin_id, $plugin_definition);
+  }
+
   /**
    * {@inheritdoc}
    */
@@ -46,6 +58,7 @@ public function getConfig(Editor $editor) {
       'DrupalEntity_dialogTitleAdd' => t('Insert entity'),
       'DrupalEntity_dialogTitleEdit' => t('Edit entity'),
       'DrupalEntity_buttons' => $this->getButtons(),
+      'DrupalEntity_inline' => $this->configuration['inline'],
     );
   }