I have used a variety of yarns. The lesser expensive ones include the Bernat Baby Jacquards (100% acrylic), like the Easter Egg color variations shown here. I also have used Knitcol Trends, which is 100% Lana Merino Virgin wool Superwash, and is more on the expensive side. It is lovely, but you also need to think about whether the child will be able to have a wool product on their skin. Both wash well. Also, both are self patterning, which means that those beautiful patterns come from the yarn itself and not by changing colors every so many stitches.
Let me make an observation about baby sweaters. They are, first of all, relatively small, and therefore not as intimidating as setting your cap to make a large adult sweater, which can be scarry and sometimes frustrating, coming out of the starting gate of sweater-making. You can learn about how to construct any size sweater by starting small, and if there are no "little ones" in your life at the moment, you can always donate them to a great cause. My personal favorite, Kent County Hospital's Blue Denim Ministries, is run by my friend and the Episcopal Archdeacon in Rhode Island, Robin Higbie for at-risk babies and their parents. They will gladly take any baby hats, sweaters and blankets that you want to send their way. Any other clothing donation center will be glad to take your sweaters, and it's a great feeling to know that, as you learn, you are helping others. Here, by the way are some more pretty hats that went to Blue Denim Ministries!
Second, it doesn't take an outrageous amount of yarn to make a baby size sweater, so go for it! At most, you are looking at 3 or 4 small skeins of yarn, and it's a great time to try some of those fabulous yarns that you have been holding on to. Third, and this is also great if you are planning to donate your finished project to a good cause, ask your knitting buddies if they would like to share in the fun by going through their stash and either knitting along with you or donating some yarn to the cause. Working together is fun, helps to share the task and gets more to those who need it a lot quicker. And in the end, you have also added to your community store of knowledge.
In our Tuesday night knitting group, Knit Happens, we are always interested in charities that we can apply our talents to. Sue, our fearless leader, is willing to consider any idea that will help others. We have made baby hats, ladies scarves, booties-- you name it and it's been done. My sister, Judith, spends a considerable amount of time making adult size sweaters and they are then donated to a local shelter. The director there commented how wondeful that is because often there are not that sort of donations for adults and they are very, very well appreciated! My Tuesday morning Knitting Ministry Group at the Cathedral of Saint John (http://www.cathedralofstjohn.org/) is always working on something for babies, adults, the Navy Project, the Army Project-- well, you get the idea!
Have a great day!