By replacing the screen it will fix your lifting issue.. The lifting of the screen occurs when the glue that holds the bezel of the screen to the glass starts letting go... Is this what your phone looks like?
It seems like you are having a problem with your digitizer... Have you recently dropped the ipod? Has it been kept in a dry place? Anything like a hard drop or water can destroy the internal connections... It doesn't seem like you are having a software problem but you could try backing up the ipod and restoring it.. I don't think it will fix it but it's worth a try... How to back up and restore a ipod
Take a look at the connections on the phone side and screen side under a microscope and make sure none of the connections are damaged.. Sometimes if you put too much force or push the connectors too far you can damage a pin... It also could be a defective screen... the screens on ifixit are the best quality on the internet... If you could post some photos I don't mind helping you further..