1) Remember that a pipe thread is a nominal, not actual size. A 1/8" NPT thread doesn't measure 1/8" anywhere, not to mention they are tapered!

2) Understand that this part is a temperature sender for the temperature gauge, not a temperature switch for an alarm.

3) Regardless if you are installing a water temperature sender or a water temperature switch, never use any type of common PTFE pipe sealing tape or pipe joint compound on the threads. The sender or switch are modulating the connection of the instrument to the ground by way of the engine block. If you insulate the threads, they can't make the connection to ground and the instrument will not function properly.