The game averages your highest level equip for each gearslot when you start a new area. It has a Dark Souls style weapon upgrade system so if you pump upgrades into a bunch of weapons/armor and then don’t use them you can handicap yourself.

The lower level upgrade materials start to get VERY abundant once you move up to another tier so the difficulty will end up leveling out on the next area as long as you don’t screw yourself too hard.