* 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 level in five years in October as consumers became more optimistic about the overall economy in a possible boost to President Obama's reelection hopes next month.
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.
It was well above the median forecast for a slight decline to 78 among economists polled by Reuters.
The new buoyancy among consumers comes shortly after the U.S. unemployment rate tumbled to its lowest level in nearly four years in September as more people returned to the workforce and found jobs than economist 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.
U.S. stocks were higher after the news. The S&P 500 climbed 0.2 percent in morning trade but pared some of its earlier gains as equities struggled to make headway after recently climbing to highs not seen in five years.
The unexpected jump in consumer sentiment in October 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.
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.
(Editing by James Dalgleish)
Keywords: USA ECONOMY/