I would also think contact allergy too. Food allergies cause hives, which can be tiny (looks like a rash) or big old nasty sores. The hives can appear almost instantly or take hours to appear, depending on the severity of the allergy. If anything, I'd say they were sensitive to the red dye. It's hard to imagine neither hadn't ever eaten red dye though!
I have a severe allergy to shrimp and got a bite of one accidently this summer. Within a minute of swallowing I broke out in incredibly itchy hives, then my tongue and lips went numb and my hands swelled (it made the bridal shower a little too exciting).
I think you were very consciencious to be so helpful in trying to figure out what happeded, but I don't think you did anything you shouldn't have when making your cake.