It's true that people are incentivized more to keep their Bitcoin over actually spending them, and we're seeing the effects as early as now, even while supply is still rising. There's no way it will work as a replacement to fiat with the way our economy is set up, where growth is driven by debt and spending -- the question is, why would we need Bitcoin to replace fiat in the first place?
True! Bitcoin wasn't created to become mainstream currency or a direct substitute to fiat. It was created as a mean of online remittance without involving third-party like PayPal, etc. - A P2P direct cash system. It surely fulfils this promise. We can conduct an anonymous transaction, anytime, anywhere with Bitcoin.
But the problem is people's misconception. Lot of members here advocate as well as promote Bitcoin as a currency. Well, there is no denying that Bitcoin has most of the features a currency could have. One can certainly use it to pay for goods and service. But it's just one aspect of Bitcoin. It is wrong to limit it to this particular use-case only.