Is a relative path in a CSS file relative to the CSS file?

Yes, it's relative to the .css

Here's an example layout:

Page:  page.htm ... does not matter where
CSS:   /resources/css/styles.css  
Image: /resources/images/image.jpg

CSS in styles.css:

div { background-image: url('../images/image.jpg');

Yes. It is relative to the CSS file. I'll add that this also includes relative to the domain the CSS file is on.

So if the CSS is referenced as:

<link href="http://www.otherdomain.com/css/example.css" type="text/css" rel="stylesheet" />

and it contains:

div { background-image: url('/images/image.jpg');

The background will be:

http://www.otherdomain.com/images/image.jpg

To the CSS file.