Those little tooth pillows are darlilng; it would be a shame not to give them to little ones just because their parents have made this last-minute change.
Perhaps somebody suggested no gifting b/c of financial situation? You might be surprised who is feeling stressed over money - even if they continue to spend to save face. Or maybe they just don't want more "stuff" because clearly they don't put the effort into gift giving that you do.
I think you've already been given the gift - the gift of caring. You cared enough to find out what colors, etc., and made something special for them. You have a generous heart, or wouldn't have done that to begin with. Don't let their attitude change yours. Give the gifts, enjoy the spirit of Christmas that you truly do have.