Inner dialogue. Internal thought. Interior monologue. Internal speech. Whatever you call it, this internal thought process is as important as regular dialogue, character arc, and narrative arc in helping your reader understand your main character at an intimate level. It also serves to move your story forward and keep your readers deeply connected. Unlike the one- or two-dimensional characters you see in movies and on television, when using inner dialogue in your narrative, it helps you present a much more nuanced and three-dimensional character. And since most stories are character driven, you really need to add that inner dialogue in.
The Chicago Manual of Style, putting dialogue in the middle of paragraphs depends on the context. As in the above example, if the dialogue is a natural continuation of the sentences that come before, it can be included in your paragraph. The major caveat is if someone new speaks after that, you start a new paragraph and indent it. On the other hand, if the dialogue you’re writing departs from the sentences that come before it, you should start a new paragraph and indent the dialogue.
Dialogue is a fantastic way to bring your readers into the midst of the action. They can picture the main character talking to someone in their mind’s eye, and it gives them a glimpse into how your character interacts with others. That said, dialogue is hard to punctuate, especially since there are different rules for different punctuation marks—because nothing in English grammar is ever easy, right? We’re going to try to make this as easy as possible.