The item squish is a hotly debated topic on the forums. That's not really surprising. It's a pretty big change. Any time you're talking about any sort of reduction to character power (which, it must be restated, the item squish isn't, but it can appear to be) people get nervous. Part of the problem is calling it an item squish at all. It's not merely that, however - the squish is taking place across the board, to monsters and NPC's and encounters as well as our gear. And it's happening in a broad way, relative to the expansion endgame spikes of level's 60, 70, 80, 85 and 90. It's not a surprise that endgame play tends to introduce gear of escalating power, nor is it a surprise that as the next expansion comes out, we tend to see a gradual increase in mob health and damage and gear so that by the max level cap of said expansion, everyone's essentially shed most if not all of their endgame gear from the last expansion only to see a new cycle of gear escalation.
This isn't really in dispute. However, looking at the chart above, you can see that the steepness of the player power gain was getting ever sharper, and the projected 90 to 100 jump magnified the already high 80 to 85 and 85 to 90 curves. Why did gear start expanding in power so much more dramatically after level 80? Why were both the level 85 and level 90 endgames such steep climbs in power at endgame?
Let's take a look all the way back to Wrath of the Lich King to answer that question.
The process of stat squishing is a flattening one, one that's cumulative - flattening out the level 60 endgame then means flattening out the 60 to 70 leveling game, which then by necessity flattens the 70 endgame even more, which then necessitates flattening out the 70 to 80 leveling curve and the 80 endgame, and so on. The 60 endgame gear will be the least effected, while expansions like Mists of Pandaria with its many tiers of endgame gear itemization will see the most. We're told that ilevel on gear isn't going away, as players use it to identify gear quality, but the differences between (as an example) ilevel 369 and 372 gear (normal and heroic tier 11 raid gear) will be less pronounced.
The first expansion to really see a runaway power level increase in its endgame was Burning Crusade. We can easily compare this heroic dungeon drop to this end of expansion raid drop. (This comparison is complicated to some extent by the changes to items introduced in Cataclysm that magnified all weapon DPS due to the loss of ranged weapons for all but hunters, and the loss of melee weapon stat sticks for hunters, but it's still worthwhile.) As startling as this scaling can be to look at (the polearm from Sunwell Plateau is nearly twice as powerful as the one from the heroic dungeon) it's nothing compared to its successor. Wrath of the Lich King saw an endgame scaling explosion.
For comparison's sake, we'll look at this ilevel 200 sword from a Wrath heroic, and this ilevel 284 sword from the last boss of the expansion on heroic. Every stat on the higher ilevel weapon is more than doubled, including the weapon's DPS. Part of the problem here is that, unlike BC which only had one version of each raid, WoTLK had 10 and 25 man, and began the introduction of heroic or hard-mode raiding, with attendant rewards. We saw raiding in the expansion start with fights like Sartharion, with specific fight conditions that could be defeated by players for greater rewards. This meant that raids like Ulduar, in addition to having to itemize for two separate encounter sizes, had to itemize to offer sufficiently improved itemization over the 'hard mode' drops from Sartharion. Ulduar continued this trend, with several fights offering a 'hard mode' achievable through a specific fight condition (destroying XT's heart, pushing a button on Mimiron, varying the fight order on Iron Council, pulling Thorim into the fray before 'Sif' despawns) as well as a fight that was only a hard-mode. This meant that Ulduar had 10 man loot, 25 man loot, and then 10 and 25 man hard mode loot to consider.
But it was in Trial of the Crusader and Icecrown Citadel that we saw the furthest extension of this paradigm. Both of these raid dungeons dispensed with having 'hard modes' achievable via fight conditions, and instead introduced the toggle system still in use in Mists of Pandaria - now, to raid what became known as 'heroics' one simply toggled to that difficulty. In Trial of the Crusader these were considered wholly separate raids - you could raid ToTC on 10, then 10 hard, then 25, then 25 hard in the same week. Some of us routinely cleared the instance four times in a reset. This resulted in a gear spread varying between 232 gear from the normal 10 man to 258 from the heroic 25. ICC did away with the separate lockouts, but it kept the modes, meaning that ICC gear went from ilevel 251 in normal 10 to ilevel 284 at the heroic 25. Without heroic modes, it's quite likely that Wrath could have ended the expansion at ilevel 251. But more than Wrath's itemization inflation (which was itself large) it was the concept of the heroic mode (and the improved itemization on its rewards) that would contribute to scaling creep in the next two expansions.
Cataclysm did away with the 10/25 man split, but retained the normal/heroic mode distinction, leading to the aforementioned 359/372 split in the first tier of raiding, then the 378/391 split in Firelands (complicated by Ragnaros himself, who dropped higher ilevel gear in both normal and heroic) but it reintroduced a wrinkle in the form of Raid Finder. The last tier of raiding in Cataclysm brought a third level of gear itemization - now we would have Raid Finder, normal, and heroic levels of gear. It also had an end boss with higher ilevel weapons than the rest of the instance, spreading itemization out further - there were three versions of Gurthalak available at the end of the expansion, for example, ranging from 390 to 416.
Mists of Pandaria, in turn, inherited Cataclysm's raid spread, and then after having three levels of itemization per raid tier for two tiers of raiding, introduced its own wrinkle with flexible raiding leaving us in the current situation of having LFR, flex, normal and heroic gear. In Warlords, that complexity will remain - we'll have LFR, Normal (current flex), Heroic (current normal) and Mythic raiding, each with its own level of itemization. It's the need to have discrete levels of difficulty with their own levels of reward that has inflated gear, as it did in Wrath of the Lich King. It didn't help anything that Mists introduced the Thunderforged and Warforged item, gear that's even better than other gear that drops in the same difficulty. This leads to a situation where the best weapon dropped by the last boss of the expansion is nearly three times the melee DPS of the weapons dropping in heroic 5 player dungeons.
Flattening out the expansion power creep won't have a significant gameplay effect on our power provided that all stats are flattened in the same fashion - an effort Blizzard has detailed. As long as your attacks do the same percentage of damage, taking off the same relative amount of enemy health, and their attacks do the same to you, balance will be maintained. The reason we're flattening out stats now, and not five years from now, is because the complex difficulty settings of modern raiding demand itemization that rewards the increased challenge, which means that expansions to follow had to ramp up the scaling as well. How will this be solved going forward? One way is to have the rewards scale less between these difficulty levels. Each difficulty level will provide a smaller bump in power, meaning that at the end of the expansion we see a less massive spike in overall power than we see at the end of this expansion. One thing that needs to be simply not done in Warlords is the idea of Thunderforged/Warforged items - they complicate itemization even more, leading to six versions of the same boss drop.
In general I think stat squishing was unavoidable, but we don't have to see it again for a few expansions as long as we keep complications to a minimum. We have four levels of itemization to consider in raiding - we don't need artificial 'suffix forged' gear making it worse, especially with flex removing the 10/25 man distinction altogether and mythic implementing a 20 player cap for the hardest difficulty. Of course, we'll also have a lot more room to grow this time, and that should level things out.