I believe you are mixing the effect of innovation that causes everything to become cheaper, and inflation that causes everything to cost more in currency. It appears that inflation is reducing quality, when what is happening is inflation outpaces the deflationary pressure caused by innovation.

Innovation generally has the connotation of improvement, but it can also be used to reduce costs and increase profits without necessarily improving quality of the individual unit of a good.

For example, look at the price of potato chips. The quality of the chips continue to decline by using cheap seed oils and pesticide infused potatoes. Indeed the price continues to go up, the quality an quantity goes down, but the innovation is in reducing cost to hold the price steady or minimize the rate of increase in price. True, inflation adds to the pressure to innovate in these ways, but the underlying problem isn't that companies are making these changes, it's that the average consumer isn't aware or concerned enough that this is happening and they continue to purchase these products. This lack of awareness by the consumer combined by the seemingly coordinated race to the bottom aggravated by market consolidation to the food behemoths yields an end-product that is on the verge of poisonous.

I don't see how bitcoin fixes this other than reducing the opportunity for consolidating buyouts, to wit anticompetitive monopolization, by the means of cheap corporate debt from the government monopoly over the interest rate and over-investment in dividend yielding securities as a result of tax deferred benefit programs.