The evil-spirits-of-the-week are phantoms who will only really exist if the pilgrims believe in them. They plan to prove their existence by killing them, eventually getting Monkey into a cauldron of acid that will only kill him if he believes it will.
Those wacky buddhists, eh?
To give the episode some credit where it's due - the changes in lighting between the seemingly harmless, though deserted, village and the domain of the undead is well done and atmospheric, which does help to create a sense of danger for Tripitaka. The lack of silly monster costumes for the phantoms helps too.