Sadly this is a big problem with the iPhone/iPod touch architecture, and something that we have communicated with Apple about without success. The "problem" is that most music these days is super-compressed and blaringly "loud." When iShred (or Guitar) is played, we don't compress the heck out of it, so it has a hard time competing wiht the music player.
We would like to be able to turn down the music player's volume, but Apple provides no way of doing that short of turning down the "global" volume control, which affects iShred as well.
We might provide a "super-compress iShred" option in the future ... seems like the only way of dealing with it would be fighting fire with fire.