Prisoner numbers will reach 90,000 by 2010, the Home Office says.
More than 400 dangerous, violent or sex offenders have been handed the government's new indeterminate prison sentences, it has emerged.
The Chief Inspector of Prisons said the numbers being held were a problem for jail capacity in England and Wales.
Anne Owers was concerned the government had not introduced a national strategy for handling serious offenders.
The scheme, introduced on April 1 2005, means prisoners could stay in jail until they die unless they reform.
It was introduced last year under the Criminal Justice Act 2003.
Judges can impose an indeterminate sentence which requires the parole board to assess the offender before they are eligible to be freed. It can block their release if the prisoner is still a cause for concern.
In her annual report, Ms Owers said: "The growth of indeterminate sentences is already posing a problem for the prison system.
"Within eight months, over 330 prisoners were serving the new indeterminate public protection sentence, with little by way of a national strategy for maintaining them."
Ms Owers said that since the period covered by the report, the figure had grown to "well over 400".
"There is no national strategy for dealing with these sentences and, in my view, there needs to be," she said.
She accused the Prison Service of "over-inflating" figures on how much time offenders spent in education or in work.
Prison Service targets encouraged staff to "tell their managers what they wanted to hear", she said.
"The statistics that are returned are sometimes an incredibly optimistic view of what might happen on a good day," the report said.
"These figures are apparently neither checked nor verified by senior managers.
"In nine out of the 18 local prisons and four out of the 12 training prisons we inspected, the figures recorded seriously misrepresented real outcomes."
She said that in too many jails inspected by her team during the year, progress had stalled or gone backwards, but she praised the Prison Service for reducing the number of suicides behind bars.
She also expressed grave concerns about the government's plans to merge her job with a number of other inspectorates, saying that it risked "diluting" the independent oversight of jail conditions.
A Home Office spokesman said the indeterminate sentence ensured prisoners who posed a continued risk to the public are not released until they are no longer considered dangerous.
"Every receiving prison has a strategy in place for dealing with these prisoners at the beginning of their sentence."
Home Office minister Baroness Scotland said: "This report recognises the continuing progress made by the Prison Service and the positive outcomes it has delivered, such as the increased provision of education and training for offenders.
"The level of overcrowding in our prisons has reduced since the all-time high of 77,823 at the beginning of November last year.
She said the National Offender Management Service monitors the prison population to ensure prison is reserved for the most serious and dangerous offenders.