There is no politically correct equivalent (except for "non-magic folk" which is too long to ever replace "Muggle"). Wizards traditionally consider themselves superior to Muggles (Young Dumbledore and Grindelwald, old pure-blood families...) so it is no wonder the term sounds insulting. At the time of the story, the mindset is changing, but very slowly (wizards still play magical pranks on Muggles for kicks, as Arthur Weasley often repeats).
My interpretation is that the wizarding community is not ready for a change of terminology. That being said, it was recently revealed for the "Fantastic Beasts" movie that the American term for Muggle is No-Maj, which strikes me as modern-sounding. My interpretation is that it's a politically correct term that has not caught on outside the US.
Why exactly no one in the books says anything about the use of the word "muggle"... I think it's because there is no obvious alternative. Mudblood is very obviously offensive, not of everyday use, and has a neutral equivalent (Muggle-born). Muggle is less obviously offensive, it is used everyday by everyone including Ministry terminology and it has no easy neutral equivalent (except No-Maj, which out-of-universe hadn't been coined yet and in-universe is American English that none of the main characters can be expected to know).