According to the books of the Hobbit and the Lord of the Rings, Gandalf is known to hobbits and to Bilbo, but Hobbits are rather insular in general. As an outsider Gandalf is somewhat distrusted, but he is known for his fireworks which are much liked. Gandalf from his side has taken a liking to Hobbits and knows a lot about them and their history - so is known in the Shire.
I think there is a suggestion that they did meet when Bilbo was a child, but I do not believe that Bilbo is lying or acting here - I don't think there is a personal history between him and Gandalf, I just don't think he remembers anything more than the firework displays.
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