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* Consumer sentiment highest in five years
* Producer prices gain but inflation pressure muted
* U.S. stocks edge higherBy Edward Krudy
NEW YORK, Oct 12 (Reuters) - U.S. consumer sentimentunexpectedly rose to its highest in five years in October asconsumers became more optimistic about the economy in a possibleboost to President Obama's reelection hopes.
The Thomson Reuters/University of Michigan's preliminaryOctober reading on the overall index on consumer sentiment camein at 83.1, up from 78.3 the month before, and the highest sinceSeptember 2007, the survey showed on Friday.
The new buoyancy among consumers comes shortly after theU.S. unemployment rate tumbled to its lowest in nearly fouryears in September as more people returned to the workforce andfound jobs than economists had predicted.
"We are getting some quite interesting signals from consumersentiment and employment data - both (the) unemployment rate andinitial claims - that there has been some quite significantimprovement in the economy," said David Sloan, an economist at4Cast in New York.
Economic issues have been a battleground in the electioncampaign as Obama seeks to burnish his credentials as acompetent manager of the economy while Republican challengerMitt Romney has faulted his record on job creation and growth.Friday's sentiment report was the last ahead of the Nov. 6 polland will be welcomed by Democrats.
The sentiment reading was well above the median forecast fora slight decline to 78 among economists polled by Reuters.
U.S. stocks were higher after the news but pared some oftheir earlier gains as equities struggled to make headway afterrecently 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 consumersfelt better about the economy in both the long and the shortterm, the compilers of the Thomson Reuters/University ofMichigan survey said.
"What changed was how they (consumers) evaluated economicconditions," 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 79.5from 73.5, well above an expected reading of 74. Expectationswere at their highest since July 2007.
The survey's barometer of current economic conditions roseto 88.6 from 85.7 and was above a forecast of 86.
A separate report showed U.S. producer prices rose more thanexpected in September as the cost of gasoline surged, butunderlying inflation pressures were muted in a sign the FederalReserve has room to carry out its new monetary stimulus program.
"If you take out food and energy you are essentiallylooking at a number that didn't go anywhere and was actuallyprobably a little weaker than expected," said Cary Leahey, aneconomist at Decision Economics in New York.
"These kinds of energy prices are debilitating to theeconomy and it is one of the reasons why we haven't been able toget any kind of a glide speed above a 2 percent annual (growth)rate."
The Labor Department said on Friday its seasonally adjustedProducer 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 1.7percent in August.
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(Editing by James Dalgleish)
((edward.krudy@thomsonreuters.com)(646 223 6314)(ReutersMessaging: edward.krudy.thomsonreuters.com@reuters.net))
Keywords: USA ECONOMY/