For a few years my group had some fun playing a few games of Godbound, a demigod OSR RPG. It was a game letting you play level 20 D&D characters and beyond pretty much off the bat, but with much streamlined rules. It was pretty fun at first, but since the game is very much focused on combat, you could notice a problem that in other games might've been obscured by complex mechanics - Godbound had a Power Inflation problem.
Basically, in Godbound and probably most RPGs, your character will grow in power as they gain XP, gather loot and so on. Their HP, damage output, etc. will increase and you will feel good because "bigger numbers are more better". However, at the same time, the game has to compensate for the extra power you gained. Now fighting low-level enemies feels too easy, so the GM has to throw bigger and meaner things at you, with more HP and higher damage output to challenge you. If you haven't noticed, nothing has changed with the level up - your numbers have increased, but enemy numbers have also increased, you still take a comparable amount of hits / turns to kill them, but now the numbers are bigger. This is basically Inflation, as you have entered a treadmill where you run in place...
Arms race ruining fun
Another aspect of the Power Inflation that might be even more explicitly worse would be an arms race between the players and the GM. Basically, if you have a rather open-ended character creation system that's vast enough, you can find some really broken combinations of spells, abilities or what have you that would let you punch way above your weight class. In response, the GM would have to throw even more challenging enemies at you, or possibly also resort to using some dirty tricks, broken combos or some other shenanigans to keep up "to challenge the party". This path pretty much leads to frustration if left unchecked:
"Narrated D&D Story:
How I Accidentally Triggered A Cold War
Between The Dungeon Master And The Party"
Basically, RPGs are supposed to be a collaborative storytelling tools that help both the GM and the players tell interesting stories, not a war gaming competition to see who can be the strongest. Sure, if that's the group's jam, go for it, but more often than not it's one or two players powergaming, while others might be left behind the power curve, making balancing combat harder than it would usually be. This is not to mention how much enjoyment players that aren't combat-focused would get out of sessions like these, or being told that they can't even hit the enemies.
One way or the other, it circles back to the same Power Inflation problem - combat gets too easy or too complicated, the other side of the table compensates and we're back to square one - combat taking X amount of hits / turns, except the numbers are bigger and the process is more complex. If one side overcompensates, then you have to get back to balancing things. This can get especially problematic when you have unstable combat systems (ones where it's hard to land the balance where you intend, often resulting in things being too easy or too hard).
Avoiding Power Inflation
Unfortunately, it's a bit hard to avoid Power Inflation in games.
Modules might sidestep the issue by giving you fixed enemies to encounter. This fixes the GM side of things to an extent, meaning it's up to the players to be the balancing factor - either doing some more prepwork if the going gets tough, or taking on a bigger challenge if things get too easy. If someone brings an OP build, they are ruining their own fun, which might not be that big of an issue. That being said, this assumes the module is well-balanced, which is a big problem in itself (although you'd expect some hard balancing work being done by the authors that were paid to make these, but that might be a pipe dream in the industry...).
Shorter games might not suffer from this issue as much, because the Inflation doesn't have time to set in, but this mostly avoids the issue by not engaging in character progression.
Similarly, there are games out there that have really slow progression system, like Star Trek Adventures. In that example you start as a fully capable characters on the level as Picard or Spock and you only get to directly increase your attributes every 6+ sessions. Even those increases are not that big, meaning the Power Inflation from levelling is glacial, and since you're expected to have a roster of secondary characters to use on adventures, the GM can expect the player characters to be competent and play their enemies accordingly.
This sort of approach practically means you don't level your character. You can shift their attributes and other things about them about more, but that's mostly it. Some games like Fellowship or other Powered by the Apocalypse also don't see much in the vein of character's power growth over the course of the game.
What else could be out there?
While the previously mentioned are about the only ways I've seen games avoid Power Inflation, but one could think of a few more that I haven't encountered in the wild.
You could have a game that's about players creating their own encounters in the spirit of Monster Hunter and "lets grind this for resources". This way it's up to the players to pick their own battles, prepare for them, get the rewards they want and so on. Add some time pressure in the vein of Kingdom Death: Monster and you have pressure on players to optimise getting as much from any given encounter as they can, so they are incentivised to push themselves to the limit and battle the meanest set of enemies they can survive. It would probably make the game very focused on that one loop unfortunately, and you're basically reinventing Kingdom Death:Monster...
A different approach would be to move the Power Inflation focus away from stats and onto a "scale factor". So say, a rookie warrior would be fighting with "+2 to hit Scale 1" and fighting "Scale 1 rats", resolve things as normal. Eventually they level up but instead of increasing their to-hit, you bump their Scale up. Eventually you are a veteran warrior with "+2 to hit Scale 10" and fighting "Scale 10 demon". If you want some growth, you could reset the "+x" each time you go up a Scale and then focus on buying it back.
This perhaps makes the Power Inflation very explicit, but allows game designers to laser-focus on refining the engagement at any Scale, because the Scale is only a set dressing. You could perhaps compare this to something like Dragonball - after awhile, the character power level is meaningless, but every arc you find a new villain that's stronger than the heroes, and then you have to train to get strong enough to beat them, etc. Everything is cyclical, you just move the reference power level sliding scale higher and higher to always have the characters in view. Every now and then show the players how weak lower Scale enemies are and introduce a big bad that's a higher Scale than them to show them they have a new challenge to beat and you have something to work with...
Of course, this might get into the criticism I sometimes hear about universal RPGs, where there isn't a difference between two snails fighting and two gods fighting, everything's still the same mechanically. You want those to feel different, but how you do that without over-complicating the mechanics and over-inflating the numbers...
Conclusions
Power Inflation in RPGs is a tricky problem to handle. On one hand, you expect your character to grow over the course of the game and become more capable, but on the other hand, you always want to be challenged on your adventures, so the enemies have to grow alongside you. Even if you over-focus on something to be the best at it, the GM only has to compensate harder to give you the challenge when it's needed.
It's hard to address the issue of Power Inflation without removing character advancement in its entirety, or making it really flat. Ideally, you'd have a system that deals with the issue and gives the GM the tools to balance things for their party, but that might be easier said than done...
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