You understood perfectly what the other person said but preferred to act as if you hadn't. For any reason: it may be that any reply would be embarrassing, it might start an argument, or would make you franker than you wished. In a nutshell, it would make you talk about things you preferred not to.

example: a comment such as "Why don't you dye your hair blonde? I'm sure your husband will love it." when you have found your husband is having an affair with his blond colleague.

The idiom or phrase should fit here: I think she understood perfectly well what I meant. She just ____________.

Edit: for clarity. I'm not looking for "turn a deaf ear". An innuendo is usually subtle and the person pretends to have missed its real meaning.