I believe this refers to spiritually dead.
Ephesians 2:1-5
"And you were dead in the trespasses and sins in which you once walked... But God, being rich in mercy, because of the great love with which he loved us, even when we were dead in our trespasses, made us alive together with Christ—by grace you have beensaved".
There are several opinions on the passage from St. Peter's epistle. I'm not familiar with "spiritual death" as one of them. More common opinions are:
1) This is a reference to Christ's descent into Hades, and what Christ preached was His victory over the powers of sin, death, hell, and the devil--this is a victory proclamation and is a crucial aspect of the historic Christian doctrine of Christ's descent into the place of the dead, which is what is referred to whenever the Apostles' Creed is recited, "He descended into hell"--His descent into hell is not "going to hell" but entering into the depths of death, to the place of the dead, and the spirits here are the imprisoned fallen powers Peter mentions in 1 Peter 3, which provides the necessary context for what is being said in 1 Peter 4.
This preaching of the Gospel, then, is not an evangelization; but is the victory proclamation of God's conquest of death and the devil. Thus the spirits in prison are not unbelievers, but the dark powers, fallen angels, devils, demons, whatever else we might want to call them. Because the Gospel for human beings is Good News of our rescue; but this same Gospel is, for the devils, the declaration of their bitter defeat and downfall--they've lost, God has won.
2) If the spirits in prison are, instead, viewed as the souls of the dead--the dead who were wiped out during the flood--then this does beg questions: Is the preaching to the spirits in prison, those who formerly disobeyed, in hearing the Gospel perhaps able to upon hearing the Gospel be lifted up and out of the prison? And how does this jive with where in Hebrews we read "It is appointed for man to live once, and then the judgment", which suggests that at the time of our mortal death we experience a judgment, what is traditionally known as "Personal Judgment" which is a foretaste of the future and Final Judgment. I don't have an answer to my own question, but that is certainly an important question we need to ask if we take a view such as this about what St. Peter is writing.
3) I'm going to offer a third option here, which I'm not sure how pervasive it is, or how defensible it is; but in the back of my mind I'm sure I've heard some offer this view: The spirits in prison, and thus the preaching of the Gospel to them, refers to those who died before the time of Christ and that, in this way, the descent into hell and proclaiming the Gospel involves a rescue of the Old Testament saints. Essentially the ancient patriarchs are being brought out of the place of death and ultimately are brought into the fullness of God's presence through Christ's victory over hades/hell. If this view were put forward, I think it has some problems, for one the spirits are said to have been disobedient. Now I could see a counter to this by presenting the list of pre-Diluvian patriarchs contains both righteous and unrighteous--there is probably some case for that to be made and so given the uniqueness of the pre-Diluvian period this is some kind of restoration of all the patriachs. I'm just spitballing at this point. Ultimately, I just don't think this third option would really hold water.
I think the view that probably makes the most sense is the first one I mentioned. The spirits in prison aren't humans, but fallen powers. This language of the devils as imprisoned has precedence within the language of the 2nd Temple Period. It's a big theme in the Enochian literature (I'm not giving the Enoch texts legitimacy, only that they provide evidence of this sort of language in the time period which would have been well known to Peter and all the early Christians). There is also the large amounts of ambiguity when we talk about devils/demons/fallen angels. Our modern perspective is pretty clean-cut, when we talk about devils/demons we understand them to be Satan and all his fallen angel followers who rebelled and in falling, now are down here on earth causing all kinds of problems. And while I think that's all true, I think it might also be minimalistic.
Biblical language is often a bit more complicated, for example why are the demons called dark forces in "heavenly places", or why is the devil specifically called "the prince of the power of the air"? There are, I think answers to these questions--the idea that the demons literally inhabit the air, or sky, is actually a pretty normal idea in the context of 2nd Temple Judaism during the Hellenistic era. During the 2nd Temple Period when the Jewish people were inundated with Greek culture, one of the ways Jewish thinkers responded was by viewing Greek Pagan ideas as diabolical; even borrowing a Greek word, daemon, to refer specifically to evil spirits and fallen angels. In Greek Paganism a daemon is a generic term for any supernatural being, from the Olympian gods to various nature spirits like nymphs and naiads, even a human soul could be conceived of as a daemon. But this word was appropriated in a Jewish context to mean evil spirits, to refer to ha-Shaytan, fallen angels, etc.
And this language of "power of the air" makes sense in this Judeo-Greek context, because daemons often referred to intermediate supernatural beings between the gods above and man below--in a paradigm that views spirits such as these are nefarious, as the same sort of thing as Satan is, or the various "impure spirits" or "evil spirits" we read about in the Old Testament--then this is simply a way of talking about dark/demonic spiritual forces. They are "of the air" and "in heavenly places". And, in other ways, the demons and devils are also viewed as cthonic, that is, of the underworld; probably because of death. The fires of Gehenna are said to be prepared for the devil and his angels, though this seems to speak of future Judgment, and looks similar to what we read in the Revelation about being cast into the lake of fire. Yet 2 Peter directly speaks of those demons who sinned and now are imprisoned in Tartarus (where Tartarus here is clearly a borrowing of a Greek idea, but it's a Greek idea mediated through 2nd Temple Judaism, as we find this language also in the Enochian literature) So where are the devils? Are they in the air? Are they here on the earth? Are they in in the prison-place of the dead? Perhaps all three at the same time, if we try not to try to imagine fixed physical location.
Anyway, my opinion is probably that 1 Peter is talking about Jesus proclaiming His victory over the dark powers and principalities, e.g. the devil and his fallen fellows.
-CryptoLutheran