Do you happen to know where in the chronicle this quote is from?
I'd be loathe to say that Anglo-Saxon ignorance is a better explanation than any of the others. You could also chalk it up to any combination of up to several centuries of textual telephone, political pandering, desires to legendarize one's predecessors, using sagas as primary sources, and dramatic non-literal writing.
In Serbian folklore studies, fiery dragons are understood to be descriptions of bolides (that is, in your words, a misunderstanding of a natural phenomenon). However, it seems that this is not a common topic in Western folklore studies. See this question for more details.
This is from the 793 AD Viking attack on Lindisfarne which reads:
Her wæron reðe forebecna cumene ofer Norðhymbra land, 7 þæt folc earmlic bregdon, þæt wæron ormete þodenas 7 ligrescas, 7 fyrenne dracan wæron gesewene on þam lifte fleogende. Þam tacnum sona fyligde mycel hunger, 7 litel æfter þam, þæs ilcan geares on .vi. Idus Ianuarii, earmlice hæþenra manna hergunc adilegode Godes cyrican in Lindisfarnaee þurh hreaflac 7 mansliht. 7 Sicga forðferde on .viii. Kalendas Martius.
This year came dreadful fore-warnings over the land of the Northumbrians, terrifying the people most woefully: these were immense sheets of light rushing through the air, and whirlwinds, and fiery, dragons flying across the firmament. These tremendous tokens were soon followed by a great famine: and not long after, on the sixth day before the ides of January in the same year, the harrowing inroads of heathen men made lamentable havoc in the church of God in Holy-island, by rapine and slaughter. Siga died on the eighth day before the calends of March.
It exists only in the D and E manuscript variants.
Dragons feature quite a bit in Old English, in place names (Drakelow ('dracan Hlaw'), Drake's Cross, Drake's Island, Drakeholes etc.,) in medicinal charms, and in literature (Beowulf). Given the intellectual climate, having them fly in the air as a portent of terrible things coming isn't necessarily a misconception of natural phenomenon, but rather a continuation of what they thought possible.