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.
