Shockwaves at the gas pump never sparked an inflation inferno. Companies absorbed higher energy costs; consumers gritted their teeth and spent anyway.

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Inflation was the dog that didn’t bite in 2006.

In a year of surprises — hurricanes that didn’t hit, oil that didn’t soar to $100 a barrel, a Republican majority in Congress that didn’t hold — the non-arrival of inflation was the biggest non-event of all.

Money manager Robert Doll says he worried as recently as July that inflation would surge, triggering a meltdown in corporate earnings and pummeling U.S. markets.

Crude-oil prices that month reached a record $78.40 a barrel. Copper had doubled since late 2005, to almost $4 a pound.

“The volatility in commodities was just amazing,” says Doll, chief equities investment officer for BlackRock, which manages more than $1 trillion. “That was a big scare.”

Things did look disheartening. The Standard & Poor’s 500 index tumbled 7.7 percent from May 9 to June 13. U.S. consumer prices rose for a sixth consecutive month in June.

To head off inflation, the Federal Reserve raised its benchmark rate for the 17th straight time on June 29, to 5.25 percent, the longest string since the 1970s.

By December, it was a different story. More rate increases never came, as companies absorbed higher fuel prices and inflation eased.

Oil futures contracts on the New York Mercantile Exchange fell to a low for the year of $54.86 on Nov. 17. Consumer prices were unchanged in November from the previous month, surprising economists.

Prices rose at a 2.2 percent annual rate through November, down from 3.8 percent for the same period of 2005, the U.S. Labor Department said.

“One of the functions of the markets is to prove everybody vulnerable, to humble us and occasionally humiliate us,” says Michael Metz, chief investment strategist at Oppenheimer, which manages $10 billion.

Inflation’s containment rippled through markets, leading to a rally in U.S. bonds, gains in U.S. and European stock indexes, and pain for investors who bet wrong — like Amaranth Advisors.

Amaranth collapsed after losing $6.6 billion in September by gambling incorrectly that natural-gas prices would continue to rise. Prices tumbled 10 percent Sept. 14 amid surging inventories and cooler weather that cut demand for air conditioning.

Amaranth wasn’t the only fading star among hedge funds, the loosely regulated private pools of capital that cater to wealthy investors.

Hedge funds returned 11.4 percent through Nov. 30, according to Hedge Fund Research. That trailed the 14.2 percent gain, including dividends, for the S&P 500.

Europe leads

There were other surprises, too. Europe outpaced the U.S. in economic growth for the first time since 2001. Japan was a disappointing performer, as its stock market and currency barely changed after many investors bet on a revival.

Some of the U.S. Labor Department’s recent economic reports help illustrate why inflation didn’t take off.

Executives kept a lid on labor costs. Even as the economy added 132,000 workers in November, more than economists had forecast, wages increased by only 0.2 percent. The average weekly paycheck of $574.27 last month was a modest gain from $573.25 in October.

Companies also were reluctant to raise prices in some of the most competitive global industries.

Airfares fell 4.8 percent in November, the biggest month-to-month decline since 1999, and new-vehicle prices fell in each of the past four months, according to the Labor Department.

Energy efficiency

Corporations also did more with less energy.

International Paper, one of the 30 Dow industrial stocks, says it halved use of natural gas over three years by switching to alternative fuels, such as bark and peanut shells, at its paper plants.

“We’ve just become so much more efficient than we ever thought possible,” says John Silvia, chief economist at Wachovia.

The Federal Open Market Committee said Dec. 12 that inflation pressures likely would moderate because of stabilizing energy prices, and it left the benchmark lending rate unchanged at 5.25 percent for the fourth straight meeting.

Core prices, excluding food and energy, rose at a 2.6 percent rate through November — above Fed Chairman Ben Bernanke’s “comfort” range of 1 to 2 percent.

Democrats take over

The economy competed with the Iraq war in the run-up to the Nov. 7 midterm elections.

That led to another of the year’s big surprises: Democrats recaptured not just the House, as some political analysts had predicted, but the Senate as well.

“No one saw that coming at the beginning of the year,” says Don Gher, chief investment officer of Bellevue-based Coldstream Capital Management, which manages more than $1 billion.

In December 2005, 65 percent of Americans surveyed for an ABC News/Washington Post poll agreed that the U.S. was making progress setting up a democratic government in Iraq. President Bush’s job approval rating reached 47 percent.

Republicans’ chances sustained further damage from a scandal over sexually explicit e-mails sent to congressional pages by Rep. Mark Foley of Florida. Bush’s rating sank to 37 percent in October, just before the voting. Democrats won a 31-seat advantage in the House and a one-seat margin in the Senate.

Incoming U.S. House Speaker Nancy Pelosi of California says her priorities include redeploying U.S. forces from Iraq, stamping out corruption in Congress and raising the minimum wage.

No hurricanes

The drop in oil and gas prices gained momentum with the mild Atlantic storm season, in which no hurricanes hit the U.S. coastline. Government and private forecasters had predicted as many as 16 named storms just a year after Katrina and Rita devastated the U.S. Gulf Coast.

The unraveling of investors’ fears led crude-oil futures prices to drop more than 21 percent from their July peak, to $60.53 a barrel as of Thursday’s close on the New York Mercantile Exchange. Natural gas sank to less than half its 2005 high.

Defensive investors

The turnabout upset the predictions of market forecasters such as Ralph Acampora at Knight Capital Group. He is best known for calling the Dow’s 1999 rise to 10,000.

“Investors were getting so defensive, expecting a hard landing,” Acampora says, describing a situation in which the economy goes directly from an expansion to a recession.

Acampora estimated in December 2005 that U.S. markets would drop 20 to 25 percent during 2006.

Instead, they rallied from midyear lows. The S&P 500, down 1 percent in mid-July, was up 14 percent to 1424.73 as of Thursday.

Doll, 52, says the U.S. has a good chance for a soft landing in 2007, avoiding a recession.

“We continue to get some better news about inflation,” he says.

“Investors’ concerns are slowly dissipating, and that means markets go up.”

Killing cockroaches

There was unexpected drama in boardrooms, says Nell Minow, editor of the Corporate Library, which tracks corporate-governance issues.

A new wave of scandals emerged, just four years after accounting frauds at Enron and WorldCom prompted Congress to pass the most sweeping reforms in financial reporting since the 1930s.

This year, the misdeeds involved stock options backdated to inflate their value.

Dozens of executives and directors left their jobs, and at least 196 companies disclosed government or internal investigations into whether they had manipulated options dates to boost their value.

“It’s like trying to kill cockroaches,” Minow says. “We thought we had eradicated every last vestige of cheating, and here we have this whole big category.”

Business leaders and academics, backed by Treasury Secretary Henry Paulson, are pressing to loosen some reporting requirements of the 2002 Sarbanes-Oxley Act.

The options scandal shows the law shouldn’t be weakened too much, Minow says.

Gates, Buffett

Some well-known executives announced unexpected personal transitions.

Microsoft co-founder Bill Gates, 51, surprised investors by saying he planned to step away from a day-to-day role at the company, which makes operating systems for 95 percent of the world’s personal computers.

Gates will focus his philanthropy on health and medicine, saying “there’s no reason” the world’s top 20 diseases — including AIDS and malaria — can’t be cured in his lifetime.

That work received a boost in June when the famously thrifty billionaire Warren Buffett, chairman of Berkshire Hathaway, pledged to donate $31 billion in stock to the Bill & Melinda Gates Foundation.

“You’ll do a better job of giving it away,” Buffett told his friend Gates at a New York news conference.

Companies, too, surprised investors with unforeseen comebacks.

Nintendo, Microsoft

Nintendo, lately an also-ran in the computer gaming market, scored a hit with its Wii gaming console.

The $250 machine outsold the Sony PlayStation 3 by more than 2-to-1 last month and captured casual gamers’ interest with a motion sensor that lets them mimic a tennis stroke or a golf swing.

Shares of Nintendo, with its U.S. headquarters in Redmond, have more than doubled this year.

In March, Microsoft delayed the long-awaited next version of its computer operating system, known as Vista, then disappointed investors by saying it would step up spending on consumer initiatives like the Zune music player.

Analysts wrote off the world’s largest software maker as a no-growth stock, says Rob Enderle of Enderle Group.

Instead, Redmond’s Microsoft ramped up sales of server software and got Vista on track. Its stock rose above $30 for the first time since 2002, closing Dec. 20 at $30.09, up 35 percent from mid-July.

“When they needed it most, they actually came through and executed,” Enderle says.

GM stock soars

Microsoft wasn’t the only stock on the Dow Jones industrial average stock to show unexpected life. General Motors, which had the Dow’s worst decline in 2005, was its best performer in 2006, gaining more than 57 percent as the carmaker avoided bankruptcy.

Boeing, another Dow issue, improved more than 26 percent this year as it successfully guided the launching of its 787 and Airbus ran into problems with its superjumbo A380.

Acampora says he sees the rebound by the Dow shares as a sign of further market gains in 2007.

“That’s a breakout,” he says. “You don’t mess with Papa Dow.”