Yes, CS Blogs supports saving files, such as images, to the web server and displaying them inline within the text.
The easiest wasy to do this is to use an offline blog writing client like Windows Live Writer. You can paste in images inside the post in WLW and it will automatically send the images to CS when you publish the post.
If you are writing the post from the CS blog control panel, there is a little icon in the editor toolbar that says "Content Selector" when you mouse-over it. Click on that and a modal window pops up that lets you insert images or other files into your post. You can either select from CS File and Photo galleries that you have permission to, or select the "Blog Files" tab to upload and select files on the fly.