diff --git a/packages/angular_devkit/build_angular/src/browser/tests/options/inline-style-language_spec.ts b/packages/angular_devkit/build_angular/src/browser/tests/options/inline-style-language_spec.ts
index 7160099d325c..83ae153a5310 100644
--- a/packages/angular_devkit/build_angular/src/browser/tests/options/inline-style-language_spec.ts
+++ b/packages/angular_devkit/build_angular/src/browser/tests/options/inline-style-language_spec.ts
@@ -6,6 +6,7 @@
  * found in the LICENSE file at https://angular.io/license
  */
 
+import { concatMap, count, take, timeout } from 'rxjs/operators';
 import { buildWebpackBrowser } from '../../index';
 import { InlineStyleLanguage } from '../../schema';
 import { BASE_OPTIONS, BROWSER_BUILDER_INFO, describeBuilder } from '../setup';
@@ -106,6 +107,67 @@ describeBuilder(buildWebpackBrowser, BROWSER_BUILDER_INFO, (harness) => {
           harness.expectFile('dist/main.js').content.toContain('color: green');
         });
       });
+
+      it('updates produced stylesheet in watch mode', async () => {
+        harness.useTarget('build', {
+          ...BASE_OPTIONS,
+          main: 'src/main.ts',
+          inlineStyleLanguage: InlineStyleLanguage.Scss,
+          aot,
+          watch: true,
+        });
+
+        await harness.modifyFile('src/app/app.component.ts', (content) =>
+          content.replace(
+            '__STYLE_MARKER__',
+            '$primary-color: green;\\nh1 { color: $primary-color; }',
+          ),
+        );
+
+        const buildCount = await harness
+          .execute()
+          .pipe(
+            timeout(30000),
+            concatMap(async ({ result }, index) => {
+              expect(result?.success).toBe(true);
+
+              switch (index) {
+                case 0:
+                  harness.expectFile('dist/main.js').content.toContain('color: green');
+                  harness.expectFile('dist/main.js').content.not.toContain('color: aqua');
+
+                  await harness.modifyFile('src/app/app.component.ts', (content) =>
+                    content.replace(
+                      '$primary-color: green;\\nh1 { color: $primary-color; }',
+                      '$primary-color: aqua;\\nh1 { color: $primary-color; }',
+                    ),
+                  );
+                  break;
+                case 1:
+                  harness.expectFile('dist/main.js').content.not.toContain('color: green');
+                  harness.expectFile('dist/main.js').content.toContain('color: aqua');
+
+                  await harness.modifyFile('src/app/app.component.ts', (content) =>
+                    content.replace(
+                      '$primary-color: aqua;\\nh1 { color: $primary-color; }',
+                      '$primary-color: blue;\\nh1 { color: $primary-color; }',
+                    ),
+                  );
+                  break;
+                case 2:
+                  harness.expectFile('dist/main.js').content.not.toContain('color: green');
+                  harness.expectFile('dist/main.js').content.not.toContain('color: aqua');
+                  harness.expectFile('dist/main.js').content.toContain('color: blue');
+                  break;
+              }
+            }),
+            take(3),
+            count(),
+          )
+          .toPromise();
+
+        expect(buildCount).toBe(3);
+      });
     }
   });
 });
diff --git a/packages/ngtools/webpack/src/ivy/host.ts b/packages/ngtools/webpack/src/ivy/host.ts
index c888b88f9b5d..d8d0033f6803 100644
--- a/packages/ngtools/webpack/src/ivy/host.ts
+++ b/packages/ngtools/webpack/src/ivy/host.ts
@@ -58,7 +58,12 @@ export function augmentHostWithResources(
     }
 
     if (options.inlineStyleMimeType) {
-      const content = await resourceLoader.process(data, options.inlineStyleMimeType);
+      const content = await resourceLoader.process(
+        data,
+        options.inlineStyleMimeType,
+        context.type,
+        context.containingFile,
+      );
 
       return { content };
     }
diff --git a/packages/ngtools/webpack/src/resource_loader.ts b/packages/ngtools/webpack/src/resource_loader.ts
index 4cee20dd2885..07018f2df4a1 100644
--- a/packages/ngtools/webpack/src/resource_loader.ts
+++ b/packages/ngtools/webpack/src/resource_loader.ts
@@ -98,13 +98,16 @@ export class WebpackResourceLoader {
     filePath?: string,
     data?: string,
     mimeType?: string,
+    resourceType?: 'style' | 'template',
+    hash?: string,
+    containingFile?: string,
   ): Promise<CompilationOutput> {
     if (!this._parentCompilation) {
       throw new Error('WebpackResourceLoader cannot be used without parentCompilation');
     }
 
     // Create a special URL for reading the resource from memory
-    const entry = data ? 'angular-resource://' : filePath;
+    const entry = data ? `angular-resource:${resourceType},${hash}` : filePath;
     if (!entry) {
       throw new Error(`"filePath" or "data" must be specified.`);
     }
@@ -116,7 +119,11 @@ export class WebpackResourceLoader {
       );
     }
 
-    const outputFilePath = filePath || `angular-resource-output-${this.outputPathCounter++}.css`;
+    const outputFilePath =
+      filePath ||
+      `${containingFile}-angular-inline--${this.outputPathCounter++}.${
+        resourceType === 'template' ? 'html' : 'css'
+      }`;
     const outputOptions = {
       filename: outputFilePath,
       library: {
@@ -215,7 +222,14 @@ export class WebpackResourceLoader {
         if (parent) {
           parent.children = parent.children.filter((child) => child !== childCompilation);
 
-          parent.fileDependencies.addAll(childCompilation.fileDependencies);
+          for (const fileDependency of childCompilation.fileDependencies) {
+            if (data && containingFile && fileDependency.endsWith(entry)) {
+              // use containing file if the resource was inline
+              parent.fileDependencies.add(containingFile);
+            } else {
+              parent.fileDependencies.add(fileDependency);
+            }
+          }
           parent.contextDependencies.addAll(childCompilation.contextDependencies);
           parent.missingDependencies.addAll(childCompilation.missingDependencies);
           parent.buildDependencies.addAll(childCompilation.buildDependencies);
@@ -298,7 +312,12 @@ export class WebpackResourceLoader {
     return compilationResult.content;
   }
 
-  async process(data: string, mimeType: string): Promise<string> {
+  async process(
+    data: string,
+    mimeType: string,
+    resourceType: 'template' | 'style',
+    containingFile?: string,
+  ): Promise<string> {
     if (data.trim().length === 0) {
       return '';
     }
@@ -307,7 +326,14 @@ export class WebpackResourceLoader {
     let compilationResult = this.inlineCache?.get(cacheKey);
 
     if (compilationResult === undefined) {
-      compilationResult = await this._compile(undefined, data, mimeType);
+      compilationResult = await this._compile(
+        undefined,
+        data,
+        mimeType,
+        resourceType,
+        cacheKey,
+        containingFile,
+      );
 
       if (this.inlineCache && compilationResult.success) {
         this.inlineCache.set(cacheKey, compilationResult);