Yep, he's abandoned being just 1 colour, and decides he's going to be EVERY colour - power-lust, basically.
I can't rmemeber if he's just dressed in dirty rags in RotK, or if this happens later, but in a draft for The Voice of Saruman chapter (at Isengard) Gandalf speaks to him, and tells him his Many Colours have started to run, as his cloak has turned a muddy colour due to the deterioation of all the colours in it.
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