We had the same experience as you are having - a great deal on the flights but good hotels are very expensive. There seems to be no way around it. We were there in December and I did a lot of research before we went. Cusco, Sacred Valley, MP, Lima. I chalked it up to going at peak season.
We were advised to drive straight to the Sacred Valley on landing in Cusco, which reduced our altitude significantly in one hour. We stayed at the Sol y Luna, which I absolutely adored. It was also a relative bargain, less than $200 for a kind of deluxe large private yurt. Very comfortable, very private, very elegant in a rustic way, very well appointed. We stayed 3 nights and it was my favorite hotel in Peru.
We were at the Pueblo in Aguas Calientes (I believe the town is now called Machu Picchu). Very nice place, best food we had in Peru, orchid walk in cloud forest is not to be missed. Friends were staying at the Sanctuary, and as another poster said, the Pueblo seems the better choice, although if you're going for one night it probably makes sense to stay at the Sanctuary.
We stayed at the Monasterio in Cusco (beautiful public rooms, a real treasure of a private chapel off the lobby, tiny overstuffed bedrooms. Not worth the $400+ a night but we joined a bunch of people who had chosen that hotel, so we had no choice.)
Lima was the real surprise. We loved it. We saw not a single church or museum. We hired a fantastic taxi driver for a full day and went to several markets, to Callao the fishing town for the simplest best fish for lunch, to the city center and a look at the Hotel Bolivar. Then we met some local people and went to the (slightly) artsy district whose name escapes me in the evening. We spent 3 nights in Lima and wished we'd stayed longer. I know it's not on your itinerary, but if there's a gap between your arrival at LIM and your departure for CUS, I really recommend a cab ride around town.