The inflation in Cataclysm is ludicrous. Gear inflation, gold inflation, XP inflation, it's all silly. Gear inflation is particularly obvious, though. My first green quest reward in a new zone was not only better than my current weapon, it outstripped it in every way. The minimum damage of the new weapon was the same as the maximum damage of the old, the speed and thus damage normalisation being equal. And this is an epic crafted weapon—perhaps not close to the best to be found in Northrend but certainly the best a fairly casual player like me could ever attain—replaced by a mundane quest reward, from the very first quest I complete in the new zone.
It's depressing. I won't claim that I worked hard for the epic weapon, but I was still proud in having crafted it. You could argue that I shouldn't get so attached to virtual items that are likely to be both replaced and rather ephemeral by nature anyway, and you'd have a good point. It's not really that I have to discard these items—I have taken long sabbaticals and not missed them, after all—it's more that they become irrelevant so quickly, and by such a margin.
There are practical reasons too why the inflation is undesirable. All the time spent at the level cap, happily collecting materials or spending time in battlegrounds, getting the best items possible, is put in to perspective. I have to wonder if it will be worth my going through the same process if the gear I manage to get will also be made vendor trash the moment the next expansion arrives. Luckily, I found my actions fun in themselves, the gear being a side benefit to my actual enjoyment, so I will probably be quite happy to go back in to battlegrounds or dungeons purely for fun.
I still feel rather unpowered in the new zones of the cataclysmic Azeroth, though. All of my weapons and armour, despite being some of the best in the game, simply cannot prepare me for the new mobs, who seem to be expecting Cataclysm gear, hitting harder and needing to be hit harder in order to be defeated. Before I get through enough quests, or pick up enough random drops, to replace most of my gear I am hitting far below my level, severely weakened by the inflation that has seen my gear fall from epic to inefficient through no action, or inaction, of my own. I struggle at first, suffering a few deaths, only because my gear is suddenly so poor, as if it has decayed in to obsolescence.
I am not entirely sure why there needs to be such inflation in the first place, and I know it didn't used to be so pronounced. I remember my warlock gleefully getting a cape in the original 40-man Naxxramas, on one of the early bosses too, which lasted all the way from 60th to 70th levels, not being replaced even then, and I was quite proud of that. I could wear my Naxxramas cloak all the time I adventured, and even though there was a trace of pity whenever another new cloak had to be disregarded because it didn't quite match up to my Naxxramas cloak, I always liked knowing that it was only because of the teamwork and skill of a whole raid group that got me the cloak I continued to wear.
It seems to me that players can be broadly split in to groups when an expansion comes, although obviously making sweeping generalisations to do so. The hardcore raiders won't care too much about the new continents and regions, levelling quickly so they can reform the raid group and hit the new dungeons. They do this to get access to the new best gear and, as such, don't really care for any items they pick up when levelling as they will be replaced just as quickly as they are gained. Another group will be the casual raiders, with some decent gear but happy to experience the new content more fully. The third group are the casual players, unlikely to visit even heroic dungeons, and slowly taking in all the content at their own pace.
The hardcore raiders won't care for inflation, as they discard any new gear as soon as they enter heroic dungeons and then again when they raid. Offering inflated gear along the levelling path will only slow them down, as they have to pause to consider which item is better to keep. I imagine this group would be happy to have their current epic gear remain epic until the new raid dungeons, to speed the process. The casual raiders also probably don't want gear inflation, for much the same reason I outline for myself. The epic items become nondescript greens, trophies of your achievements wiped from your character. Needing them to be replaced instead with blue items, only one step down from epic items instead of the two that greens are, would give a better sense of progress to the casual raider, and would let them bask in their epic glory for a little longer. The casual players will be hit hardest by inflation, struggling against the harder mobs until they can replace their horribly insufficient blues and greens with wonders they've never seen before. If there were no inflation, and just the same incremental progress as before, this group probably wouldn't even notice and remain happy to explore at their own pace.
Inflation as it stands in World of Warcraft seems to be unnecessary, from the point of view of keeping players happy, and more of a way to highlight the new content. But it essentially resets the game, and as new expansions come along the resets occur in arbitrary places. There is no reason why the gear you can get up to 60th level—58th, effectively, with access to the auction house—should be far inferior to gear after 60th level, when the maximum level is a decade or two above that. If the game is going to reset itself, perhaps it should make a better job of it. I have read about how A Tale in the Desert undergoes 'retellings', where the world is reset, everyone dropped back to where they started, as is the world itself. Everyone starts again, from scratch, albeit it personal experience intact to make the next telling smoother. Maybe this is a bit drastic for World of Warcraft, but something similar could be done.
Instead of increasing the level cap with each expansion, knock players back down levels, perhaps down to 40th level. Let them keep most of their spells, better travelling options, and access to the world. The newly introduced regions can be presented as 40th to 60th level content, letting the previously capped players level up again. The spells and talents can be rejigged much as they would normally, without having problems of inflating damage or healing ability, or of a wealth of talent points being spread more widely and creating unintended synergies. It would also offer the opportunity to reward more spells or talents at some levels, rather than restricting them, which is now the case. Gear can be adjusted to match shifting design goals, for example changing the focus from hit bonuses to haste, also without the need to inflate the numbers astronomically.
The benefits seem plentiful. Without inflation, the damage and healing done remain relatively familiar, making player adjustments minor. New regions introduced in the expansion become alternative routes to the level cap, instead of mandatory. Characters at the level cap can explore the new regions, alts can revisit their favourite areas, even mix-and-matching regions if they prefer. Grouping is made easier, as alts and new characters don't have to work so hard just to get close to playing with friends' characters at a different level, or to try a new class with guild members, the level cap not being raised. The lack of gold inflation should help to prevent costs becoming an impediment to the casual player looking to buy simple items like glyphs or enchantments for low-level characters. And, at the end, all end-game content remains viable, catering to old-school players, who want to raid Molten Core, and progressive raiders alike. Even casual players can visit any level-cap dungeon from any expansion and be the right level, seeing the content as it was designed.
There are drawbacks too. The level-restricted items, most notably the epic raid loot, will need to be removed. But this can be dealt with, perhaps making them heirloom items—a neat solution that already shows players are happy not to be replacing gear every few levels—that level with the character until it reaches its previous power, at which point the player can enter the next raid dungeon and strive for the better gear now available. The time available between expansions can still let characters accumulate plenty of gold, but maybe this can simply be reset to a reasonable maximum value, to restrict inflation. New players will only see one of the 40th-to-60th level regions, unless creating alts, but the number of new players is insignificant compared to the installed base, and the variety of play available should remain a positive aspect.
The main issue I can see with partially resetting the world is the perception of the players to seeing their progress taken away from them. But this is already happening with the inflation of each expansion, epic items being replaced immediately, gold ripped from purses as new options are introduced, and the levelling of characters starting anew. The game has reset, all your progress is gone. It seems a folly to rely on a simple deception to convince players otherwise. Reset the world, drop everyone back down, and give us more to explore, and more overall options.