I think he was trying to contain the evil energy inside him cause by extreme anger, but it proven too much for him to handle, so he was forced to expel it out.
We're never given any indication that Fatty's power increased in that sequence, but then the counter people use is that it was such a quick sequence that nobody noticed, so... whatever, I guess.
It's fat buu trying to contain his rage (literally) while Satan runs away with the dog. Once Satan leaves buu releases it and the smoke forms into evil buu.
No power increase is stated or implied. In fact he should be getting weaker as the smoke leaks out, since it's forming into a half of his being.