The “Day of the Dead” observance is a local - mostly Hispanic - cultural form of an ancient Catholic discipline for obtaining a plenary indulgence for a poor soul in purgatory. This discipline is still in force and was re-stated and encouraged by Pope Benedict XVI.
I On All Souls’ Day (Nov. 2) a plenary indulgence, applicable only to the Poor Souls, is granted to those who visit any parish church or public oratory and there recite one Our Father and one Credo.
II On all the days from November I though November 8 inclusive, a plenary indulgence, applicable only to the Poor Souls, is granted to those who visit a cemetery and pray even if only mentally for the departed.
** Conditions for both indulgences:
Only one plenary indulgence can be granted per day.
It is necessary to be in the state of grace, at least by the time the work is completed.
Freedom from attachment to sin, even venial sin, is necessary; otherwise the indulgence is only partial. (By this is meant attachment to a particular sin, not sin in general.)
Holy Communion must be received each time the indulgence is sought.
Prayers must he recited for the intentions of the Holy Father on each day the indulgence is sought. (No particular prayers are prescribed. One Our Father and one Hail Mary suffice, or other suitable prayers.
A sacramental concession must he made within a week of completion of the prescribed work. (One confession made during the week, made with the intention of gaining all the indulgences, suffices.)**
I have attended the Day of the Dead observance in the Philippines (a partly Spanish culture). It is a solemn, yet joyful event. On November 1, the family of the deceased gathers from all over the country and beyond. They fast during the day, then go to the graveyard at night, carrying a lot of food. They clean and decorate the graves of their departed family members. Then at midnight (Nov 2) they light candles and pray for the departed and for the intentions of the Holy Father - often the rosary is recited. Then they break the fast, share their food and the older folks tell stories about the departed to remember them and to help the children know the ancestors whom they have never met. I found this to be a very uplifting and beautiful celebration and a wonderful tool for building family unity and identity.
If there are graves that are unattended (Catholic or not), friends from different families will form small teams to clean and decorate them. No one is left out of the observance.
I also saw many old friends who had not seen each other for a long time meet and exchange food, good wishes and prayers between their families. It is really something to behold - and very Catholic.