Generally, characters can get raised, but they have to get their hands on a raise dead somehow, which isn't always easy. Also, often players decide that their character doesn't want to be raised, and roll up a new one instead.
For new PCs, we've tried lots of different things. Imposing severe XP penalties in comparison to raising doesn't seem entirely fair, so generally people get raised one level below what they were. However, I want to encourage people to maintain their characters, for sake of the story, so people who make a new character start at the beginning of the appropriate level, while people who get raised drop to midway.
For items, typically, signature items are returned to the family/buried with the corpse/donated/whatever, but minor items are often kept. People don't die so often that this causes inflation.