When creating children's clothing, I have pretty definite tastes when it comes to the yarns I like to work with: they needs to be low-maintenance yet scrumptious, and the colors should be really special. Oh, and they need to not break the bank ;)
This means that I tend to gravitate towards the same yarns over and over again, and usually choose one of the following, depending on what I need for a particular design.
For everyday wear and to make a simple design shine: Malabrigo Rios
This is * such * a great yarn, and a real pleasure to knit with. Worsted weight merino is hands-down my favorite for kids' clothing. It's soft and squishy, and works up so quickly! This kettle-dyed yarn is also Superwash (which means that it can grow if you dry it flat so be careful and swatch and block first!) and comes in many vibrant hues.
Plomo, one of my favorite colorways, has a semi-solid quality that really adds dimension to a sleek, minimalist garment such as my Hyphen cardigan:
Other colorways with a bit more variegation, like English Rose or Lotus can also make slipped stitch patterns look amazing.
For a rustic outdoorsy feel: Cascade Ecological Wool
This yarn isn't Superwash, so it might not seem like an obvious choice for a child's clothing item. However, it's such a good value and a great workhorse yarn, and I think that it is perfect for outerwear, which - hopefully! - doesn't need to be washed as often as a cardigan does. It's 100% wool and quite warm, and gets surprisingly soft after blocking. I've used this yarn for my Latte Baby Coat:
I love it in natural colorways like the Taupe shown above but the Cascade Eco+, which is the dyed version, has really lovely vibrant colorways too, like the Hot Pink or the Chelan Lake, which I used for these two Tiered Baby Coats:
For a soft, light-weight garment: Debbie Bliss Baby Cashmerino
This is a really good bet when it comes to sport weight yarns. It's very soft against a baby's skin without being overly slippery, it's Superwash and it comes in * many * gorgeous shades. It's also pretty ubiquitous and often comes on sale. I like to use it for lightweight garments that will be worn directly against the skin, for example, a 3/4 sleeve summer cardigan such as Alouette:
or a dress like Claudine:
For quick summer projects: Spud and Chloe Sweater
Perfect for a no-fuss summer item, this worsted weight wool/cotton blend is organic, super soft and not *too* warm. Like an old t-shirt, it is easy to care for and gets softer with each use. This is a perfect yarn for a summer baby blanket or a quick baby shower gift like the Carousel cardigan: