I'd wash the flannel because of the shrinkage issue...it's going to shrink, but...
I'd definitely wash it because it'll be for a baby. Most of our fabrics are printed overseas, which means they've been shipped on big boats in crummy shipping containers. I can only imagine the stuff the bolts are sprayed with to try to keep them safe from bugs.
I'd wash it, because I'd wash it for my own kids.