St Johnstone had announced on Sunday that a ban had been imposed in a bid to prevent flags being used as a shield to let off smoke bombs and flares, which is a criminal offence in Scottish football grounds.
Celtic's most recent Scottish Premiership away trip, against Motherwell, saw a number of pyrotechnics left off among away fans and two smoke bombs thrown on to the pitch.
But Celtic announced on Monday that the decision had been reversed.
A Celtic statement read: "Following discussions today between Celtic, the local police and St Johnstone FC, it has been decided that flags and banners will now be permitted at the match on Boxing Day.
"We have an excellent relationship with everyone at St Johnstone FC and we thank them and the police for reviewing their initial decision.
"Football is about colour and atmosphere and creating a positive occasion for all and everything should be done to ensure that such an event can take place.
"However, it is also imperative that the safety and the well-being of fans is given paramount importance and in this regard we share the obvious desire of St Johnstone FC and the police that all matches take place in a safe environment.
"We do not need or welcome any form of pyrotechnics at matches and clearly any continued presence of these does nothing for Celtic Football Club or our supporters.
"Celtic has already had discussions with our main supporters' representatives and we have been assured that our supporters will again back the club in the right manner at McDiarmid Park.
"With the team currently unbeaten in the league we want our fans to come and enjoy the game safely in a positive atmosphere - and hopefully celebrate the club continuing this great run over the festive season."
The statement came as Motherwell began work to replace more than 250 seats which were broken by Celtic fans during their Fir Park meeting on December 6.
Police said that 18 smoke bombs, three fireworks, and one flare had been set off inside the ground. A number of arrests have been made as police probe the vandalism inside the ground and several disturbances outside.
Those scenes prompted St Johnstone to announce their restrictions in a joint statement with Police Scotland on Sunday.
The Perth club had said: "Supporters will be aware that, regrettably, there has been a significant increase in the letting off of flares, smoke bombs and other pyrotechnics at games across the country this season.
"These are inherently unsafe not only for those around the devices but also for spectators in general, particularly those who suffer from breathing disorders. They also have the potential to set seats alight and cause flags to burn.
"St Johnstone FC and Celtic FC fully support Police Scotland in their attempts to eradicate this nuisance from our game and as part of the planning process for this match between the three parties and other agencies, and as there have been several instances of flags being used as cover for the igniting of these devices, a decision has been taken that for this specific fixture flags and banners will not be permitted inside McDiarmid Park."