This is the 104 motor, correct? I have the 103 motor and had the same issues but have been able to get the mileage up to about 20-22 in town and starting to see 25 or so on the road. Big 1400 mile road trip coming up in 3 weeks so I will know better after that what the highway mileage will be. These engines are susceptible to and are affected by vacuum leaks. Simple but hard to find leaks that are probably the biggest contributors to fuel mileage. This statement is based on both personal experience and in discussions with fellow 124 owners in MB Club tech sessions. If you have not done so already, start replacing your vacuum lines and connector fittings. Pay attention when your vacuum lines come to check valves and look closely at your check valves for cracks or heat stress. Replace the check valves. If they are not holding vacuum then they are also sucking air, not good. Also, these engines are sensitive to the type of spark plugs used. I think that engine still calls for Bosch COPPER plugs. If you have platinum plugs in there, idle quality and fuel mileage will be affected. Also, did you install a BOSCH Distributor cap and rotor? When I replaced the fuel distibutor on my 91 300E with a rebuilt from Performance Products ( a PYTHON brand if remember correctly) my fuel mileage did not get better and actually got worse before I finally replaced with a Bosch rebuild. Even though the first rebuild was cheaper than the Bosch rebuild, it was money wasted. I think it was close to $600 or so. Performance Products wouldn't do anything about that unit even though it was documented as a bad unit. One reason I dont do ANY business with Perf Prods now. There are several vacuum solenoids that are in your vacuum system that control ignition advance and the air pump that can affect mileage. What about you egr valve? You don't state how many miles are on this vehicle but if it is in the 100's then I would look at that also. The vacuum solenoids mad a difference to my milegae and driveability when I replaced them. Also, your wires may LOOK good but they could be bad internally. It might be time for a set of BERU wires. They aren't the cheapest but will last longer that the BOSCH or any other brands.
Hope I gave you some ideas. Good luck.