This chart suggests that touched [in the head] became more popular during/following WW2.
Doubtless the number of real-world referents increased because of traumatised soldiers and civilians, and increased contact between people of radically different backgrounds meant one would meet people who seemed decidedly "odd" from your perspective, even if they were considered "normal" in their home environment.
I don't think the chart (or my own experience) suggests the term has "fallen into disuse" any more than one would expect in today's more "socially correct" publishing environment. The allusion is to touched by God, and it's been around since at least 1742. It's something of a euphemism, along the lines of today's even more common "Always remember, Mrs Smith, your child is 'special'".
As well as any decline associated with changing social attitudes (or at least, acceptable terminology for use in public), it's worth noting that the expression always had somewhat limited applicability. Many related words like mad, insane, moronic, idiotic, etc., have long been used as casual/jocular insults, but it's important to note that most such words can easily be applied to an individual act or statement ("Doing that would be crazy!").
To my ear, touched [in the head] has always seemed slightly "softer" and more indulgent than many close alternatives such as cuckoo, loco, cracked, deranged, unhinged, loony, etc., most of which sound far more dated and/or callously uncaring to me.
Noting the way gay is routinely used today as a general-purpose insult (piggy-backing off the "original" negative homosexual connotations), I don't think there's really any evidence to suggest that popular speech is moving towards greater tolerance and inclusiveness. Mainstream media are perhaps more careful in their choice of terminology today - but even if there is greater social awareness of autism and other mental health issues among better-informed people these days, I don't think this is going to change the popular vernacular much.