The use of italics within the dialogue of a text typically refers to one thing: an internal dialogue is taking place. In regards to the indentation and italics (plus quotation marks) during Pauline Breedlove's account of her relationship to Cholly (in Toni Morrison's The Bluest Eye), these allow her dialogue to be shown, and understood, as her account of something which has happened in the past.
The idea behind this is illustrated further by the things with Pauline speak about. Pauline speaks about growing up in Alabama, getting the nail in her foot at two, caring for her younger siblings, and her relationship with Cholly later in life. The use of italics illustrates her dialogue as both happening in the past and act as a signal to the reader that it could be taking place in her mind alone (internal dialogue).