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* Consumer sentiment highest in five years
* Producer prices gain but inflation pressure muted
* U.S. stocks edge higher By Edward Krudy
NEW YORK, Oct 12 (Reuters) - U.S. consumer sentiment unexpectedly rose to its highest in five years in October as consumers became more optimistic about the economy in a possible boost to President Obama's reelection hopes.
The Thomson Reuters/University of Michigan's preliminary October reading on the overall index on consumer sentiment came in at 83.1, up from 78.3 the month before, and the highest since September 2007, the survey showed on Friday.
The new buoyancy among consumers comes shortly after the U.S. unemployment rate tumbled to its lowest in nearly four years in September as more people returned to the workforce and found jobs than economists had predicted.
"We are getting some quite interesting signals from consumer sentiment and employment data - both (the) unemployment rate and initial claims - that there has been some quite significant improvement in the economy," said David Sloan, an economist at 4Cast in New York.
Economic issues have been a battleground in the election campaign as Obama seeks to burnish his credentials as a competent manager of the economy while Republican challenger Mitt Romney has faulted his record on job creation and growth. Friday's sentiment report was the last ahead of the Nov. 6 poll and will be welcomed by Democrats.
The sentiment reading was well above the median forecast for a slight decline to 78 among economists polled by Reuters.
U.S. stocks were higher after the news but pared some of their earlier gains as equities struggled to make headway after recently climbing to highs not seen in five years. The S&P 500
rose 0.1 percent in mid-morning trade.
October's unexpected jump in sentiment came as consumers felt better about the economy in both the long and the short term, the compilers of the Thomson Reuters/University of Michigan survey said.
"What changed was how they (consumers) evaluated economic conditions," survey director Richard Curtin said in a statement. "Economic conditions during the year ahead were expected to be 'good' by more consumers, and more consumers expected 'good' economic times over the next five years."
The survey's gauge of consumer expectations jumped to 79.5 from 73.5, well above an expected reading of 74. Expectations were at their highest since July 2007.
The survey's barometer of current economic conditions rose to 88.6 from 85.7 and was above a forecast of 86.
A separate report showed U.S. producer prices rose more than expected in September as the cost of gasoline surged, but underlying inflation pressures were muted in a sign the Federal Reserve has room to carry out its new monetary stimulus program.
"If you take out food and energy you are essentially looking at a number that didn't go anywhere and was actually probably a little weaker than expected," said Cary Leahey, an economist at Decision Economics in New York.
"These kinds of energy prices are debilitating to the economy and it is one of the reasons why we haven't been able to get any kind of a glide speed above a 2 percent annual (growth) rate."
The Labor Department said on Friday its seasonally adjusted Producer Price Index increased 1.1 percent last month. Economists polled by Reuters had expected prices at farms, factories and refineries to rise 0.7 percent after climbing 1.7 percent in August.
Graphics: Consumer sentiment - Producer prices:
Instant view on consumer sentiment:
Instant view on PPI:
(Editing by James Dalgleish)
Keywords: USA ECONOMY/