It's not needed, but can it be useful? Maybe. I welcome 2560x1440, but only after they iron out other issues.
For example, if the next Nexus gives 2560x1440 but the same shitty camera and bad speaker, then yeah I'd be pretty irritated.
I think displays have reached a point where we can stop pushing for ridiculous resolutions and focus on other features first.
el oh el. off topic: shitty camera AND bad speaker?
Everything is about (a) Is there a quality supplier that can push the quantities required (b) How much more will you pay for that item and (c) will it irreversibly affect the consumer experience and (d) will the consumer pay extra for it, or will they purchase your product instead of a competitors.
If 1440p 5" screens are mass produced at slightly higher prices, and it doesn't irreversibly affect the consumer experience by resulting in 2 hours of battery life, and the consumer will buy it over a competing product, then why would a company not integrate it? What does a camera, where most consumers probably don't care that much, have to do with it?
The reality is that when you mass produce millions of devices, there is a lot of thought that goes into it; there are obvious total misses in any product even with lots of careful consideration. However, when these 'misses' carry over forward it indicated that there was a conscious trade off. I promise you they found that the average consumer was okay with the camera as it was, and that paying more for a better camera didn't work out well. Luckily, since technology typically becomes cheaper over time to produce, certain upgrades can come for "free" (ie: look at the price of memory on digikey - the difference between various sizes at large quanitities can be near negligible in some instances)
edit: Here is an easier way to explain it.
Scenario 1 - User: Hmmm this Nexus Phone has everything I need, but the camera isn't great. Well, as I look through samples, I think I can live with it. The [insert phone here] has better quality, but I don't think I want to pay an extra 200 dollars.
Secnario 2 - Google: We missed sales targets on the Nexus 5 by about 5%. Our research has indicated that despite everything else we offered, people opted for [insert competing phones] because of the camera. Our next iteration needs to resolve this because we have even higher sales expectations.
on topic:
no end user/consumer has seen a 1600p 5" screen yet. I'm sure when they come out, we'll be seeing LOTS of 720p vs 1080p vs 1600p comparisons. 1600p would be nice, but I'd be concerned about (a) still having a fluid experience and (b) still maintaining the level of battery life.