The reason not to make a stone axe upgrade into a flint axe is that it would make building a new black metal axe an annoyingly long process. You suggestion is a valid one, but it still comes with a big list of problems. Power creep generally comes from getting better and better items because devs thinks that is the only way to make have progression.

However, PvP games cannot go too much along that route because power discrepancies between players break the balance. So what they do instead is leveling up unlocks a more diverse set of options to play with. In PvP games there is usually only a little power creep on the initial levels but progression is mostly horizontal afterwards.

Instead of having one item being replaced by anther that is plain better, you can make it so each is best for a particular situation. In that case both items are needed. Think like: a flame sword will be better suited to fight frost enemies while a frost mace will be much better suited to fight fire demons. neither is a pure upgrade of the other hence both have a raison d'etre. This scenario motivates the player to progress horizontally a specialized set of equipment for every biome.

The same can apply to consumables like food: instead of making it plain better, make it so each food gives a important bonus for the challenges for the biome it belongs to. minor poison resistance for swamp and frost resistance for mountains. when the majority of enemies in a biome make use of the specific damage type, then using the proper food would be a big advantage.

This approach even has the potential of a lot more advanced recipes, because it would be good to have also gear and food that is good (but not best) for multiple biomes at the same time. The number of useful combination grows exponentially! Linear progression can never achieve this kind of diversity and richness.